Monthly Archives: September 2009

My daughters (average age: four) have a serious credibility problem. “Daddy, if you read just one more story, then we’ll go to sleep.” “Mummy, if you give me a snack now, I promise I’ll eat up all my dinner.” You know what, my darlings? We just don’t believe you, so there’ll be no extra story and no snack.

Such troubles are not solely the preserve of little girls. Managers promise performance bonuses, workers do not believe them, and so the hoped-for performance does not materialise. Governments promise to keep a lid on inflation, nobody takes them seriously, and that is one of the reasons the lid comes off.

These problems have solutions. Most adults build up enough of a reputation for honesty that their promises tend to be believed. Politicians delegate inflation management to central banks, which – despite recent travails – are both more credible and more successful inflation-busters.

Yet when it comes to climate change, few people are talking about time inconsistency. They should be. I can find no reason to take seriously any government promises on the subject.

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

Behavioural economics, the application of psychological insights to economic theories and problems, has been growing in influence for decades. But with the publication of Richard Thaler and Cass Sunstein’s Nudge, it seems to have struck policy primetime – and as with many once-good ideas, it has mutated. I recently attended a meeting at one government department at which the conversation rarely strayed from the question of how the latest marketing tricks could be used to get citizens to behave as the nanny state preferred.

At a seminar for the UK’s government economic service on applying behavioural economics to public policy, I therefore expected to be the lone voice of caution – especially since fellow panellists included Dan Goldstein, a psychologist, and Pete Lunn, author of Basic Instincts, a popularisation of behavioural ideas. I was wrong: while everyone was impressed with the potential contribution of psychology and neuroscience to economics, they all seemed queasy about how quickly behavioural economics has appeared as a policy panacea.

Lunn began by displaying Poggendorff’s optical illusion, in which a diagonal line passes behind a vertical block, creating the impression of two separate but parallel lines. Thaler and Sunstein have a similar optical illusion at the beginning of chapter one of Nudge. Their point: the human brain has evolved to take short cuts in the way it processes information, short cuts that sometimes lead us astray. Hence, sometimes we could use a little help in nudging us towards the correct decision when we make mistakes.

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

Samantha, my PA, is so very unreliable. For example, she failed to pass on your invitation to feature as a responding correspondent in your recent “Dear Undercover Economist” plug article. However, she does have a fantastic pair of, er … feet. Should I fire her?
Bob Casablanca

Dear Mr Casablanca,

Much depends on your line of business. In Mel Brooks’s masterpiece, The Producers, the crooked Broadway magnate Max Bialystock hires a blonde bombshell, Ulla, whose secretarial skills consist solely of the ability to pick up the telephone and intone, “Bialystock unt Bloom, Good tag por day.” She can, however, dance. Bialystock is happy enough, which is understandable given that the sole aim of his production is to go bankrupt.

It is unlikely that you share Bialystock’s aims, but if you work for a large organisation, you may share his contempt for his shareholders. Your PA’s incompetence largely disadvantages them, while her aesthetic appeal – which an economist might call a “non-pecuniary benefit” – is enjoyed by you alone.

Naturally you have to ensure that your PA’s failings are not so disastrous as to damage your own career, but that should be manageable, especially if you continue blaming her whenever something goes wrong.

If you own a large stake in the business, the trade-off is more painful. Samantha will be costing you money. I cannot advise you as to the right course of action, since I don’t know how much money you have, how much you want, and how “fantastic” she really is. I would simply note that you can always look for other options. You could hire a second PA to work in parallel with Samantha. Or you could seek out a PA who offers the best of everything. It cannot be impossible to find an assistant who is both effective and attractive.

Questions to economist@ft.com

My colleague Michael Peel has a new book out, “A Swamp Full of Dollars“. I’m looking forward to reading it, but it has rave reviews from Louis Theroux, Joseph Stiglitz and Michela Wrong – can’t be bad.

In the late 18th century, Johann Gottlieb Beckmann, a Saxon forester, hit upon the idea of systematically surveying Saxony’s forests. He dispatched trained surveyors into a tract of woodland to hammer nails into every tree. Each man carried nails of five different colours, enabling them to grade trees by size. When every tree was marked and the men emerged, Beckmann counted the coloured nails left over to calculate the exploitable resources.

Efforts to measure what goes on in the economy have a chequered history. The political scientist James C. Scott, who unearthed the example of Beckmann, points out that forest planners tried to conform to Beckmann’s theories, spacing with architectural precision trees of the same breed and age. The resulting forests were vulnerable to high winds and to disease.

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

Suppose we plot my preference curve for a man as units of “good boy” traits (thoughtfulness, caring, emotional support) versus “bad boy” traits (adventurousness, sexual attractiveness). My boyfriend, whom I’ve been dating for a year, would come up very high on the former and low on the latter. This situation was fine for me before, but now I’m having a hard time being attracted to him and I wonder if I want to continue the relationship. Has my preference curve simply shifted more in favour of the “bad boy” traits? I know the one year is a sunk cost, but I’m reluctant to give up so easily on such a nice man.
Beatrice

Dear Beatrice,

It is a pleasure to receive a letter that packs so much consumer choice theory into so little space – although I sense a creeping confusion in your question. You speak of a preference curve expressing a trade-off between good boy and bad boy traits. (By the way, I recommend the term “indifference curve”, both because it is technically more precise, and because it makes you sound sexy and unavailable.) Yet you do not specify your budget constraint. You act as if you can have a thoughtful boyfriend or a sexy boyfriend, but not both. I wonder why you think this is true. Perhaps you should hang around with economists more.

Let us take your problem at face value, though, and assume that you cannot simply find a man who has it all. If so, the problem you describe is familiar enough: that of diminishing returns. Only little children want to eat their favourite food for every meal, or listen to the same story again and again. For most of us, variety is the spice of life. So dump your boyfriend and find a rogue. Date him for a year. It is bound to end in tears, and then you can find yourself another ugly, tedious – yet thoughtful – man. They are not in short supply.

Send questions to economist@ft.com

The last in this series of More or Less: Radio 4, 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: is the world cooling down?; Andrew Gelman on why beautiful people (like me) have daughters (like mine) – or, sadly, maybe not; Google’s Chief Economist Hal Varian; and the mathematics behind the Beatles.

When the planes hit the twin towers eight years ago this week, I wasn’t a journalist at all, but a business economist living in London. It was my job to look at what was happening to the economy and figure out what it might imply and what might happen next. Alongside the shock experienced by anyone watching the television coverage, I felt bewilderment. It seemed that the sheer physical destruction and the deaths of so many highly skilled people would have to disrupt the running of the US economy – one of Osama bin Laden’s declared objectives. But with no close precedents, it was hard to say by how much.

Early estimates suggested that the economic cost alone might be grievous. The International Monetary Fund’s World Economic Outlook, published three months after the attacks, thought that losses to the US economy could total $75bn. Others thought the economic damage would be greater. Robert E. Looney, a professor at the Naval Postgraduate School, estimated in 2002 that direct costs exceeded $27bn but the effect of the disruption might total $500bn. A study by the New York City Comptroller’s Office estimated that the city alone would lose a cumulative $58bn between 2001 and 2004 as a result of the attacks.

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

I send the FT the Polymath crossword solution on a fairly regular basis, but I notice that a greater than expected number of winners hail from overseas. Would I have a better chance of winning were I to send the solution to my friends in Sweden for them to post in an envelope with a foreign stamp?
Tony Waldron, UK

Dear Mr Waldron,

You are not the only one to notice that Johnny Foreigner appears to win with alarming regularity. Still, we must be statistical.

You say that a “greater than expected number of winners hail from overseas”. But you do not say what you expect. The British make up about 1 per cent of the world population. Accordingly, there should be a British victor approximately 1 per cent of the time, or once every two years, on average. I believe the British victory rate is higher than this.

Another basis for forming our expectations is to look at subscribers. Many UK-resident FT subscribers fail to realise that they are outnumbered by overseas subscribers. If the British won Polymath half the time, this would be “more than expected”. The informal estimate of the Polymath team is that the proportion of foreign winners is roughly in line with the proportion of foreign subscribers.

After discussion with the Polymath administrator, I have concluded that her method for picking winners is reasonably random. However, she takes no extravagant precautions to ensure this is so. Perhaps foreign stamps do attract her magpie-gaze.

Even so, you must weigh the fractional additional chance of winning against the time and expense of routing your entry via Sweden. Surely the costs outweigh the benefits, unless you are motivated chiefly by the glory of having your name published in the Financial Times. If so, I believe I have solved your problem.

Questions to economist@ft.com

More More or Less this week: Radio 4 today 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: Why England Lose, an interview with the new National Statistician, dubious numbers on the prevalence of piracy, and Simon Singh on how mathematics is being prostituted in the name of advertising.

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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