Monthly Archives: August 2010

From 22nd April, 2006:

I recently did something that is, in theory, most unwise: I bought a second-hand car. Since economists hate to compromise between safety and style, it was a Volvo. You’d think I would know better. The American subtitle of my book is “Why you can never buy a decent used car”.

In 1966, an assistant economics professor, George Akerlof, tried to explain why this is so in a working paper called “The Market for Lemons”. His basic insight was simple: if somebody who has plenty of experience driving a particular car is keen to sell it to you, why should you be so keen to buy it?

Akerlof showed that insight could have dramatic consequences. Buyers’ perfectly sensible fears of being ripped off could, in principle, wipe out the entire used-car market: there would be no price that a rational seller would offer that was low enough to make the sale. The deeper the discount, the more the buyer would be sure that the car was a terrible lemon.

Continued at timharford.com.

“A wiseguy sees things if there are wiseguy things to see,” wrote Joe Pistone, the FBI agent better known as Donnie Brasco – the name under which he managed to infiltrate the mob. But what are the wiseguy things to see? And how is a wiseguy to know he isn’t dealing with the likes of Joe Pistone?

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

When I travel I am faced with a difficult choice: which of the toilet booths to use in offices or hotels. I always try to guess which one is the least used. Probability theory should tell me that all the booths should be equally used, but perhaps human psychology plays a part in this. My boyfriend believes the last one is the least used – contrarily, I believe the opposite. Perhaps this proves that, on average, all are equally used. Which one do you use?

Jan Lucan, Prague

The answer to this question can be read here. Please post comment below.

From the 15th April, 2006.

For nearly two months, a glossy magazine from my mobile phone company has been lying around the place. I took it with the intention of choosing a decent calling plan, but so far I’ve made little progress. Occasionally, I pick it up and thumb it listlessly but cannot get my mind around the different pricing options.

The permutations include on-peak, off-peak, in-network, out-of- network, joint accounts, “bundles” of this and that, and a variety of additional offers conditional on my signing some form of longer term contract. The choice is bewildering.

Usually, I have little sympathy with those who complain about the agony of choice. If the choice is important, such as when you buy a house, then it’s good to have the choice even between fine details. If the choice is not important, such as that between the 55,000 drinks alleged to be available at Starbucks, then few of us acquire grey hairs making it.

Continued at timharford.com.

“You inched towards the dark side,” joked one behavioural economist after he read a recent column in which I hinted that his field has some merits. It was a quip that got me thinking, because behavioural economics does indeed have a dark side. Behavioural economists study the psychology of economic decision-making, and if they are any good at their task they will discover something the unscrupulous salesman could use to his advantage.

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

Having bought identical garlic breads for my wife and myself, I proposed that we should equally share one immediately and equally share the second later. She was unhappy with this, proposing that she eat half of hers and that I eat half of mine. When I suggested that half garlic breads should be fungible, she accused me of making the word up. Assuming that garlic breads could be exactly shared equally, had I been correctly using established economic terminology?

Hungry Chris, Teesside

The answer to this question can be read here. Please post comments below.

From 8th April, 2006:

Anguish in Hackney. Our neighbours’ daughter – let’s call her Georgina – just missed out on a place at the local comprehensive school, a brand-new “academy”, well-funded, staffed by uber-teachers, designed by Sir Richard Rogers, with meals by the River Cafe and an organic kitchen garden laid out by Jamie Oliver.

The school is a five-minute walk away and Georgina is the brightest girl in her class, but she was unlucky. With eight applicants for every place, her name simply didn’t emerge from a carefully stratified lottery designed to draw children from every ability range and from near and far.

Now what? If her parents do nothing, Georgina will have to commute across London to a school with places going begging. No prizes for guessing whether it will be a good school. But her parents won’t leave it like that. They may head for commuterland, but more likely will remortgage the house to put her through private school. Neither option is appealing to both parents who work for modest wages at an inner-city charity, but the alternative is worse.

Continued at timharford.com.

My wife and I only argue about the big issues, such as whether it’s a good idea for her to leave utensils in the sink. For the record, clearly not: it means that coffee-filter cones and colanders which need nothing more than a quick rinse are infected with deposits of grease from other dishes. My wife is simply creating work.

The other day, as I was running a sink of hot, soapy water in order to clean a coffee-filter cone, I mused on an inconsistency: we celebrate creating jobs in the wider economy, but complain bitterly about creating them around the house.

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

In Holland we’ve got a “postcode-lottery”: every month, people living in a certain postcode win – provided, of course, that they’ve bought a lottery ticket.

As a rule, I don’t buy lottery tickets. The chances of winning are small. In my view you only pay for the privilege to dream about what you would do with money you are never going to have in real life. And I don’t know about you, but I can dream for free.

But lately I’ve started dreaming (well, it’s more like a nightmare) that my zip-code wins the lottery, so my neighbours become millionaires and I miss out on all the money.

What should I do? Join the herd and start buying tickets every month?

Rob Voorwinden, the Netherlands

The answer to this question can be read here. Please post comments below.

From 1st April, 2006.

The Labour party is accused of taking loans of £4.5m and rewarding lenders with life peerages. In the US, where everything is bigger, lobbyists spend at least that per congressman; annual spending is more than $2bn a year. Only an economist, then, would ask why there is so little money in politics.

We have seen countless hand-wringing books arguing that democracy is for sale, and, given the plentiful supply of scandal, this is easy to believe. But something doesn’t add up. Assume for a moment that the most pessimistic hand-wringers are right and the government really is for sale. How much would you pay for it? In the UK, government spending is nearly half a trillion pounds a year. If anything, this is an underestimate of how much it would be worth to control the government, since if I was an industrialist with the government in my pocket, I could order that foreigners be fended off with tariffs, and domestic competitors be bound fast with red tape.

Continued at timharford.com.

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.