Priceless Advice From 'The Undercover Economist'

'Dear Undercover Economist' by Tim Harford
Courtesy of Random House Publishing Group

Economists aren't known for their softer side.

They believe in a "Mr. Spock"-like world ruled by numbers and formulas and logic.

They should be the last people you ever ask for relationship advice.

"There is a certain irony in economists who have the least developed emotional register of any social scientist, giving dating advice," says economist Tim Harford, who lives that irony every day.

Harford is the author of the new book, Dear Undercover Economist: Priceless Advice on Money, Work, Sex, Kids, and Life's Other Challenges.

It's a collection of advice columns he has written over the years for the Financial Times, where he is on the editorial board.

And as the title shows, Harford tries to answer life's little questions using well- established economic principles.

Capitalism is not always pretty.

The advice given by The Undercover Economist is, well, unique.

"There's no consideration of morality," says Harford, who channels his pure inner economist when he writes the advice column.

And he sees that pure inner economist almost as an evil twin who doesn't care how rude he is or how much he cuts through the emotional complexities of a situation.

"Its all about what are the advantages open to you, what are the options and how can you take maximum advantage for yourself."

Harford adds, "I would put a health warning on the advice that the economist gives."

An entry in the book shows why:

Dear Undercover Economist,
I'm experiencing the strain of being in my senior year. This semester alone I need to complete seven projects and assignments, work on my dissertation and sit five exams. I am the captain of the karate club, which requires a big time commitment, and I'm applying for jobs which mean lots of interviews and assessment days in the next few months.
There aren't enough hours in the day. How do I prioritize my tasks effectively?
Derrick via e-mail

Dear Derrick,
Clearly you are not an economics student or you would have already solved the linear programming problem necessary to optimize your allocation of time. Let me instead give you a couple of pointers.
First, your time is spent investing rather than consuming. Sitting exams and applying for jobs will expand your consumption set in the future. Under the circumstances it would be reasonable to borrow. You can borrow a little time from the future with the help of stimulants. But a more practical solution is to borrow money to save time. Quit any part-time job, take taxis, hire a cleaner, order take-out. This will save time and you can worry about the costs later, when you've secured one of those precious jobs.
More fundamentally, look for opportunities to gain from trade. Your karate seems to be an area of comparative advantage, so perhaps you could convince some clever weakling to write your dissertation for you. In exchange you could beat up the boyfriend of the girl he's been lusting after. Five minutes of applied karate practice for you would be a life-transforming experience for your assistant; well worth many days of work on your dissertation.
Yours in search of gains from trade,

The Undercover Economist.

So why should someone skip Ask Amy and go right to The Undercover Economist?

"Well, sometimes because the answers are fun." Harford says. "But also sometimes the advice seems to be quite good."

And rather human.

Take the question of should a husband put down the toilet seat at home. The Undercover Economist says two economic principles could be used to answer this time-old question.

The first is based in mathematics. It would be more efficient to leave the seat as you like it since you might be the next in.

"But in my advice, you know, I said there's a bigger picture here," Hartford says. "Economists are all about not what do you say but what do you do? And it's a very, very cheap signal that shows consideration for a man to leave the seat down. He's actually showing that he's considerate, he's a gentleman."

And it's cheaper than flowers.

Believe it or not, economics can make the world a better place.

Excerpts From 'The Undercover Economist'

Dear Undercover Economist i i
Copyright 2009. Reprinted by arrangement with The Random House Publishing Group.
Dear Undercover Economist
Copyright 2009. Reprinted by arrangement with The Random House Publishing Group.

Introduction

Can economics make you happier?

Economists might not be the first people you would think of to give you advice on parenting, the intricacies of etiquette, or the dark arts of seduction. Even at best, the economist can seem a remote figure: infinitely rational, untroubled by indecision or weakness of the will, a Spock- like creature too perfect to be able to relate to mere human concerns. At worst, the economist can look like a social naif, 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 disappoint? He is not, it would be fair to say, as sympathetic a counselor as Dear Abby, Miss Manners, or Dr. Ruth. 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.

And yet, his advice can be surprisingly sound. In the six years since the Financial Times entrusted me with the awesome responsibility of answering letters to Dear Economist, I have evenwhisper itbeen known to take some of his counsel myself.

This shouldn't be surprising. While Dear Economist's bedside manner may leave something to be desired, economics itself is remarkably well suited to the agony genre. The economist's instinct to strip away social niceties and turn messy problems into simple abstractions produces just the kind of no- nonsense counsel we expect from any good advice column. Modern economics is no longer dominated by unworldly mathematical supermen but by streetwise statistical detectives focused on real- life problems. And the current debate between behavioral economists and rational choice theorists is throwing ever more light on what rational economic behavior looks like, and what happens when people behave less like Mr. Spock and more like Homer Simpson.

As a result, modern economists understand much about both how we should behave and how we sometimes fall short. If anyone is going to dispense advice with the supreme confidence of the superrational know- it- all, who better than an economist?

Dear Economist,

I'm an ambitious woman in my midtwenties, just starting what I hope will be a stellar career in business. But I also very much want to have at least one child. How long should I wait?

Yours sincerely,

Ms. E. Jones

Dear Ms. Jones,

Mothers seem to do worse in the labor market than women without children, but that might not be simple cause and effect. For instance, it might indicate that women who expected successful careers delayed having children, but the delay was not the cause

of the success.

It all seems imponderable, but it isn't. Amalia Miller, an economist at the University of Virginia, studied the timing of maternity and its effect on earnings. That effect is large: delay maternity by just one year, and you can expect your career earnings to rise by 10 percent, partly because you will work longer hours and partly because you will enjoy a better wage rate. For professionals like you, the wage effect is even higher.

These numbers strip out the effects of choice, because they are all based on accidents. Professor Miller made three types of comparisons. She compared women who became mothers at twenty-seven with those who became mothers at twenty-eight, despite both groups using contraception and therefore not choosing the timing. She also compared women who successfully got pregnant at twenty-seven with women who tried at twenty- seven but did not succeed for a year; or women who miscarried at twenty- seven and then got pregnant again a year later. The women wanted the same date of pregnancy, but bad luck intervenedand their careers benefited.

Professor Miller's results suggest that you should leave your pregnancy as late as you dare. Her methods remind you, though, that you may not get to decide.

Yours fecundly,

The Undercover Economist

Dear Economist,

When invited to dinner, I am often unsure whether to bring good wine. If I take an expensive bottle, it may go unappreciatedeither through lack of appreciation or people not seeing what I've brought. Taking cheap wine means I can get a free ride on others'

largesse, but my tightfistedness might be noticed. What do you recommend?

Alex, Geneva

Dear Alex,

A simple bit of game theory will produce the optimal strategy. If this is a repeated interaction with people who know their wine, it's best to produce a good bottle. Reciprocity for your generosity will make this a good approach in the long run.

You will need to work out whether your dining partners do indeed understand wine. That is easy enough. Bring them something decent and see if they remark upon it. Then observe what they bring the next time you dine together. If your dinners are isolated invitations, or your hosts know nothing about wine, you may cheat with impunity. In short, vary your actions according to circumstance.

There is a deeper point here, though. You need to establish what is giving your fellow diners their utilitygood wine, or the pleasure of one-upmanship? My fellow columnist, the economist John Kay, points out that economists "win" gift exchanges by

spending less than everyone else, but most people "win" gift exchanges by spending more.

If your fellow diners are economists, then my analysis will apply. Otherwise, as the sole economically minded diner, make sure your wine is a little less assuming than everyone else's. Everyone is happy, you save money, and they feel smug. The moral: never forget to look for gains from trade.

Yours parsimoniously,

The Undercover Economist

Dear Economist,

My wife and I can never agree about buying extended warranties. She says they're a waste of money; I say better safe than sorry. Isn't it just a matter of opinion?

R.A., Taunton, UK

Dear R.A.,

Needless to say, your wife is quite right.

Any kind of insurance should always be a last resort. Most people are risk-averse, meaning that they are willing to pay to avoid increased risk. If you have 1 million, you would be right to turn down an offer to toss a coin for "double or nothing," because the first million pounds is far more valuable to you than the second million.

But most insurance does not fall into that category. Over the course of your life you will earn hundreds of thousands of pounds, perhaps millions. A few hundred pounds here or there is inconsequential, and nobody should accept insurance for such

sums except on absolutely fair terms.

Most of us do not realize that we should insure only against losses that we truly cannot afford, such as large legal or medical costs, or simply watching our house burn down. We get nervous about small risks, even though if we put our insurance premiums into a savings account rather than give them to an insurance company, we would be almost guaranteed to be well ahead in the long run.

Insurance companies are eager to take advantage of our irrationality, but competitive pressures tend to keep premiums at least somewhat fair. So the ideal way for an unscrupulous company to take our cash is to spring on us a surprise insurance deal linked to a purchase we have just made, and therefore not subject to competition.

This is exactly what an extended warranty is. For a washing machine, a five- year warranty will cost about 150, but the fair value is about 10. (A washing machine repair costs about 55, and the chance of a breakdown within five years is less than 20percent.) Incidentally, your house insurance may well cover you in any case.

Put the 150 in the bank instead. I suggest it go into your wife's account: you are clearly not to be trusted with matters of high finance.

Your risk- neutral friend,

The Undercover Economist

Dear Economist,

Here in Michigan we have a problem: the auto industry. Thanks to foreign competition and the doubtful management of the Big Three, the state's economy is in serious trouble. Should we just sell the state to the Chinese? There is a history of this in Michigan

we once traded the city of Toledo to Ohio in exchange for the upper peninsula. So perhaps it would be a good idea. I am quite excited about becoming a Chinese citizen. But what would be a good price?

Yours sincerely,

Mrs. J., Michigan, USA

Dear Mrs. J.,

Make sure you don't sell yourselves cheap. According to the U.S. Bureau of Economic Analysis, Michigan's GDP was $382 billion in 2007. This is an attempt to measure the value added to all goods and services in Michigan, which includes anything from haircuts to assembling a carbut not, for instance, any components imported from out of state.

$382 billion is impressive. It would sneak Michigan into the top twenty-five economies in the world. Even China's GDP is less than nine times greater.

So how much would it cost to buy $382 billion of productive power? No corporation adds nearly as much value; the economist Paul de Grauwe reckoned that in 2000, value added was $67 billion for Wal-Mart and $53 billion for Exxon, the two largest companies. Their market value at the time was about five times their

value added.

If the same ratio applies in the case of Michigan, buying the state would cost the Chinese almost two trillion dollars. Fortunately, this is roughly what China's State Administration of Foreign Exchange has to spend, a nice coincidence.

All this assumes that Michigan's residents, like Wal- Mart's employees, would be free to leave if they didn't like the new management. Still, don't hold out too long. Even before the credit crunch hit, Michigan's GDP per head was falling in real terms. Your

home state is a surprisingly valuable property, but this may be the right time to sell.

Yours with added value,

The Undercover Economist

Dear Economist,

Can economics help me pick out the perfect Christmas gift for my brother?

Tim Maly, Ottawa, Ontario, Canada

Dear Tim,

Your letter obliges me to disinter the influential research of the economist Joel Waldfogel on the "deadweight loss of Christmas." Fifteen years ago, Waldfogel published an academic article demonstrating that the recipients of gifts would not generally have been willing to pay what it cost to provide the gift. A 30 sweater was valued at 20, for example, creating a "deadweight loss" of 10. Siblings were not the most incompetent giversthat honor goes to

aunts and unclesbut they were not especially competent either.

Waldfogel's work is often misinterpreted as suggesting that gift giving is pointless. That is not true. He explicitly excluded the sentimental value of gifts from his calculations, and, of course, the sentimental value is part of the purpose of giving presents. That may explain why the economists Sara Solnick and David Hemenway have discovered that we prefer unsolicited presents to those we have specifically requested. It may also explain why gift vouchers are a bad idea: they have no sentimental value but still create deadweight

loss, since many expire without being used, or are sold at a loss on eBayas the economist Jennifer Pate Offenberg has documented.

All of this points to the optimal gift giving strategy: you need to minimize the deadweight loss while maximizing the sentimental value. This suggests buying small gifts and striving for emotional resonance. Look for something inexpensive, and consider supplementing it with a letter, a photo, or time spent together. If you feel a financial transfer is necessary, slip a check into the envelope too. I wish you, your brother, and all the readers of this column an optimal Christmas.

Festively yours,

The Undercover Economist

Excerpted from DEAR UNDERCOVER ECONOMIST by Tim Harford. Copyright 2009 by Tim Harford. Reprinted by arrangement with The Random House Publishing Group.

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