Monthly Archives: October 2009

Here’s the hedgehog. Here’s the book. Thanks to NPR and Planet Money for inviting me on!

Superfreakonomics: Global Cooling, Patriotic Prostitutes and Why Suicide Bombers Should Buy Life Insurance
By Steven D. Levitt and Stephen J. Dubner
Allen Lane £20, 288 pages
FT Bookshop price: £16

For fans of the multimillion-selling pop-economics book, Freakonomics, all that needs to be said is that the sequel’s title is an accurate description. This book is a lot like Freakonomics, but better.

The original, a runaway hit, had its genesis in Stephen Dubner’s masterful New York Times Magazine profile of “rogue economist” Steven Levitt. “Rogue” may be stretching it a bit, because Levitt is, in fact, a garlanded and hugely influential professor at the University of Chicago…

Read the full article here.

As the debate on healthcare drones on in the US, I have been struck by a heretical thought: the differences between the British National Health Service and the US healthcare system are not nearly as important as their shared weaknesses.

The difference between the two systems has been exaggerated of late. The uninsured in America are not barred from emergency rooms by security guards. The NHS has not assembled a death panel to do away with Stephen Hawking.

I’ve had experience of both systems. My wife’s life has been saved once by American doctors and once by British ones. One of my daughters was born in Washington, DC, the other in London. And I’ll admit that the systems feel very different. The outcomes are different, the bureaucracy works in a different way, the waiting times are different and the rules of access are different.

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

After reading with interest your plan to start exercising last Christmas (by giving to charity if you didn’t meet your goals), I’d be obliged if you could offer an opinion on a similar scheme I have concocted. Wine is the problem. I drink too much of the glorious stuff, and am unable to convince myself that doing so is unhealthy.

Your idea of giving to charity would not work with me. I’m uncharitable, I’m afraid, and would probably rather lie than give my earnings away. Here is my alternative. Each month I will deposit the total amount I would spend on wine in the family joint bank account. If I want a bottle, it must come out of this account, but whatever is left at the end of the month is to be given to my wife and children.

This appears to be an excellent solution; in my view, the guilt of taking something away from my beloved wife and children is far greater than taking from myself. Do you agree?
DW

Dear DW,

In classical economic theory, your scheme would be useless. Every pound spent on the demon drink is always a pound unavailable to your wife and children, and it should make no difference which bank account you put it in.

But Richard Thaler, a leading behavioural economist, has a theory of “mental accounting” that supports your plan. We do attach different labels to different pounds: this one is for my pension, that one is slush money. And Thaler has discovered that those labels make a difference to the way we behave.

Your scheme may well work, then. But like all commitment strategies, there is a risk that it will backfire, and you end up with the worst of all worlds. You may find yourself unable to stop drinking, feel more guilty than ever, and demonstrate unambiguously to your family that you love booze more than you love them. You evidently like to live dangerously: good luck.

Send questions to economist@ft.com

Streetlights and Shadows by Gary Klein. A very interesting, well-written discussion of how decisions are made well and badly. Klein lists a number of apparently-obvious truths, eg “We can reduce uncertainty by gathering more information” and “The starting point for any project is to get a clear description of the goal” and argues that they are often false.

More specifically, such statements tend to be true in “streetlights” – simple, static situations but not in “shadows” – complex, fast-moving or unexpected situations. Lots of memorable case studies. Recommended.

I’m looking for a part-time research assistant… full details here.

For those who haven’t been able to get tickets to my talks at LSE last week or Cass Business School tomorrow, here’s yet another chance! I’m speaking about the ideas in Dear Undercover Economist at One Alfred Place on Thursday, 6.30pm for 7pm.

One Alfred Place is normally members only, but they have agreed to open the talk to non-members.

At a recent conference on experimental economics, John List, professor of economics at the university of chicago, shared a beer with other delegates and opined, “I think I used to be the most hated guy in this field.” His drinking companions jovially assured him that he still was.

So why the sharp elbows from his colleagues? Quite simply, List’s attention to the nuts and bolts of experimental method has demolished some of the most cherished results in the cool field of behavioural economics.

Consider a class of experimental games much cited by those who dispute the classical model of rational economic choice. There is the “ultimatum” game, in which player A (Anna) is given $10 and asked how much, if any, she proposes to offer to player B (Bernard). Bernard can accept the offer, but if he rejects it, neither Anna nor Bernard get anything. If Anna and Bernard were rational income-maximisers, Anna would offer one cent and Bernard would accept it as better than nothing. This never happens, so Anna and Bernard are not rational income-maximisers.

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

Should the football authorities put a cap on the total value of players, based on their transfer cost, that can play for a Premier League team in any given match? For example, although a squad might have cost a team £150m, the cap would mean that they could only use players in a match up to a value of £75m. This would create a level playing field and prevent wealthy clubs from “buying” silverware through purchasing the best players.
Keith Bates

Dear Mr Bates,

Your proposal sounds reasonable, but it is muddled on three counts. First, think of the unintended consequences of your rule. It would favour wealthy clubs with expensive established training academies, because they have a stable of young players who carry no transfer price. You would also discourage clubs from trading players if one club’s academy discovers three great goalkeepers. And would music fans be better off if Mick Jagger and Keith Richards were forced to take it in turns to play for the Rolling Stones?

Second, transfer payments are not in fact associated with success on the field. The economist Stefan Szymanski, co-author of Why England Lose, has used a statistical analysis to show that while a club’s wage bill is correlated with success, its transfer spending is not.

Finally, fans do not actually want a level playing field. Arsenal’s “invincibles” season, 2003-2004, saw them win 84 per cent of league matches and lose none. Every game was a sell-out. More rigorously, Szymanski has shown that more unequal seasons attract more fans. And why not? The big clubs have lots of fans and those fans want to see victories.

In short, you have the wrong objective, suggest the wrong rule to achieve it, and are blind to the side-effects. Any banking regulator in the world would be proud to give you a job.

Questions to economist@ft.com

According to his publisher, Dan “Da Vinci Code” Brown’s latest book, The Lost Symbol, sold more copies in its first 36 hours than any other adult hardback sold in total. (A certain boy wizard is excluded by the artful qualifier, “adult”.) The sales of Brown’s book were given a boost by an unprecedented price war. According to The Bookseller, an industry magazine, Waterstone’s offered a mere 50 per cent discount – £9.49 instead of £18.99. Tesco asked £7 and Asda £5. Asda’s book buyer celebrated “fantastic” sales, despite the fact that the store is thought to be losing £4 a copy. The old joke is made real: losing money on every sale, but making it up on volume.

Asda’s price wasn’t even the lowest available. The Book Depository, an online retailer, grabbed headlines with a price of £4.99 – whereupon Amazon quickly cut prices to match. These prices have prompted many people in the industry to feats of rhetorical self-flagellation. Industry insiders complained to The Bookseller about “ridiculously aggressive discounting” and asked “how can the book trade take itself seriously?”

To an economist, of course, this all makes perfect sense. Muddled thinking tempts us to speak of “the book trade” as a single sentient being. If it were, discounting a sure-fire bestseller from £18.99 to £4.99 would make no sense at all. But, happily for Dan Brown fans, the book trade does not have a single voice in charge and it would be illegal to appoint one.

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

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.
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