From 5th May, 2006:

On a recent trip abroad, a reputable international car rental company tried to make me an offer I couldn’t refuse. For just 110 a day, I could protect myself from the frightening-sounding insurance deductible of 1900 – a sum I risked being charged if anything happened to the car. I bravely turned them down.

This was a strikingly overpriced offering. For each day’s rental I was being asked to pay 110 to protect me from the risk of paying 1900. The mathematics are hardly difficult: the insurance is fair only if I crash into something every 90 days. If I believed that, I wouldn’t get behind the wheel at all.

There is plenty of overpriced insurance around, always bundled with some other product. A popular mobile phone retailer will insure your £50 phone for 92 pence a week – nearly £50 a year. The fair price of the insurance is probably closer to £5 a year than £50.

Continued at timharford.com.

From 28th April 28, 2006:

The news makes such depressing reading these days, as it always does when there’s a war on. But amid all the gloom, a small, curious part of me can’t help wondering whether our military escapades in Iraq and Afghanistan will produce any unexpected consequences for our daily economic life.

It wouldn’t be the first time that a war has transformed the economy. When Honore Blanc, a French gunsmith, produced 10,000 muskets a year for Napoleon, he made sure that any faulty pieces could be replaced by standardised components rather than the usual handmade parts. It was a simple idea but an engineering miracle – and without it, mass production would have been impossible.

The first world war provided a more indirect impetus to the process of technological change. More than 30 years after Thomas Edison lit the streets of New York City, the electric dynamo hadn’t produced the new efficient manufacturers that many had expected. Although huge steam engines had been replaced by huge electric motors, factories were still set up the old way: workers were clustered around the monstrous engines because the equipment they used was powered by drive belts, which meant it needed to be close to the source of power. The result was, the workers were arranged according to how much power their equipment needed, rather than what would lead to the most productive flow of work.

Continued at timharford.com.

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.

FT Comment – 4 August 2010

Anniversaries are a time for reflection and, as the third anniversary of the credit crunch approaches, I have been doing some reflecting on where I went wrong as an economist. My own errors, of course, are of particular interest only to me, but I fear that they are fairly representative of the economics profession…

Continued on ft.com

FT Comment, 21 July 2010

It says a lot about the talents of John Maynard Keynes – and just as much about the shortcomings of modern macroeconomics – that when the financial crisis struck, policymakers instinctively reached not for their fancy models, but for the Keynesian idea of fiscal stimulus. These pages have been filled with eminent thinkers arguing over whether it is time to bring the stimulus to an end.

Perhaps we should turn the question around: if stimulus were to be the solution, what would be the problem? The problem would be that too many of us wanted to save money or pay off debts; that is, we wanted others to pay for our services but weren’t so keen on paying for theirs right now. Simple arithmetic suggests this would leave slack in the economy. In addition, the problem would be that businesses, pessimistic about prospects for recovery, didn’t harness all the spare savings floating around and plough them into new investment projects. The slack would stay slack, possibly for a long time. If that was the problem then government stimulus would be the solution.

And the above paragraph doesn’t seem to be a bad description of the US or UK economy, which suggests the case for stimulus is strong. True, the patience of the bond markets is surely not boundless (and say what you like about kowtowing to the markets, if we’d like them to lend us money we have good reason to care whether they are willing to lend it). And there already is an awful lot of stimulus spending going on right now, so it’s not absurd to suggest we could get by with less as the economy bounces back. I realise that I am sitting on the fence here, but it’s part of my new maxim, which is never to stand in the middle of a fight between Paul Krugman and Niall Ferguson.

Continued on ft.com

In a sprawling convention centre in Essen, western Germany, the busiest day in the German board games calendar – Saturday at “Spiel” – is about to begin. Hall after hall of stands are piled high with board game boxes, most eschewing the garish graphics of the toy shop for evocative paintings of lands far off and times long ago.

A few minutes before the official start time of 10am, the doors are thrown open. There’s a rumble and then a roar as thousands of gamers surge into the hall, breaking and swirling around the stands, sweeping into the farthest corners of the halls, seeking out rare second-hand products or the hottest of the 500 new games being launched, or simply a good place to sit and play. The biggest stands resemble pavement cafés whose patrons grab games instead of coffee: they are filled with tables, each just big enough to seat four players and a board. Before long, the spaces in between the tables are colonised, too, with gamers sitting cross-legged around their boards.

Beyond the sheer number of enthusiasts, the striking thing is that they look, well, normal. The convention centre boasts nearly as many mothers with prams as heavy-metal-T-shirted, body-pierced teens. In one of the farthest halls, Dungeons and Dragons merchandise is on sale, and I counted more than one person wearing a sword and a cloak. But for the most part, the convention centre’s population wouldn’t look out of place on any German high street.

Continued at ft.com

Tom Ellis, author of the puzzle that is even harder than the hardest logic puzzle ever, writes with another problem:

Alice and Bob are at a party and Alice says to Bob “Mrs Smith over there has two children.  At least one is a boy.” What is the probability that both her children are boys?

The first trick is that the naive puzzler will answer “one half”, whereas his mathematical challenger will explain that the correct answer is one third.

There are three ways that Mrs Smith can have at least one boy: her elder a boy and her younger a boy; her elder a boy and her younger a girl; her elder a girl and her younger a boy.  These are all equally likely, so the probability that both are boys is one third.

The naive puzzler will smile at the correct answer, pleased that he now understands the application of conditional probability theory.

But there’s a second trick.  The second trick is that the answer is not “one third”.  The answer is “it depends”; what it depends upon is how Alice reached her decision to tell Bob about Mrs Smith’s children.

Suppose that Alice has met exactly one of Mrs Smith’s children, a boy.  Then she can quite truthfully say “At least one is a boy.” But now there are only two possibilities, equally likely: the child Alice hasn’t met is a boy; and the child Alice hasn’t met is a girl.  Thus the probability that both are boys is one half.

It’s actually *harder* to construct a realistic motivation for Alice in which the probability of two boys is one third.  Perhaps whilst checking her e-mail on Mrs Smith’s computer she saw an icon for the GI Joe website.

Political correctness aside, she might take that as a cast iron indicator that one of the following three possibilities holds: Mrs Smith’s eldest is a boy; her youngest is a boy; both her children are boys.  In this case the chance that both are boys *is* one third.

Mathematics is an indispensable means of understanding the world, but if someone says to you “At least one of my children is a boy” then the reason that they said it and the precise meaning of what they said are far more important than the probabilistic content.  The mathmatical form of reasoning should not trump the psychological and the linguistic.

Deep waters. For a discussion of the even-harder “Tuesday Boy” problem, check this out.

Why England Lose, a book published a few months ago by Stefan Szymanski and my FT colleague Simon Kuper, makes the following key points:

- England do about as well as you’d expect, given their size, economic power, proximity to football’s “core” in Western Europe, and footballing history. That is, you’d expect them to usually make the last 16, sometimes make the last 8, occasionally make the last 4 and make the final very rarely. And they do.

- Managers don’t make much difference to a team’s expected performance. Not even Fabio Capello.

- There is no correlation between the qualifying performance (which in this particular campaign was outstanding) and the performance at the championship itself (which… well, the less said the better).

Not a bad prediction from an economist and a sports pundit, eh?  It’s a fun book, too.

Tyler Cowen’s “Create Your Own Economy” is now out in paperback entitled “The Age of the Infovore“, perhaps an acknowledgement that the initial title wasn’t working out.

I liked the book at lot. As suits the infovoracious it is  wide-ranging, somewhat scattershot but extremely creative, original and thought-provoking. If the book has a theme it is that different people think very differently – not just that they have different tastes or different beliefs but that the entire way they organise the world is different – and that the internet offers some people a much better way to order their encounters with the world than they have previously been offered. It changed the way I think.

Also, you get to hear Tyler’s discussion of whether we might usefully think of Sherlock Holmes as an autistic character.

If you buy this book hoping for another “Freakonomics, “Armchair Economist” or “Logic of Life” you’ll be surprised. But if you’re a Marginal Revolution fan and want to go deeper, you’ll be enthralled.

NB Tyler Cowen and Alex Tabarrok have some textbooks out. They look interesting too but as a non-teaching non-student they have yet to tempt me to a proper review.

The last in the present series of More or Less airs tomorrow at 1.30pm BST on Radio 4. Do please join us – or subscribe at bbc.co.uk/moreorless – to find out whether we should believe the evidence that a change in the law on drink driving would save hundreds of lives, whether George Osborne’s emergency budget was quite as progressive as he claimed, and what “potty parity” actually means. We’ll also be joined by David McCandless, author of Information is Beautiful. Do please listen in.