Tag: tim harford

Economists As Storytellers

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Not just economists, of course. We’re all storytellers.

What else have we got?

“We are basically storytellers,” wrote Lucas, “creators of make-believe economic systems.”

https://timharford.com/2023/07/what-an-amusement-park-can-teach-us-about-central-banks/

I read Tim Harford’s excellent blog post on what amusement parks can teach us about central banks last night, and loved it for more than one reason. But before we get to amusement parks, let’s talk about photography first:

I often say in classes that economic models are like photographs taken by smartphone cameras. They are abstractions of reality. They can’t possibly capture all the nuances, hues, details and features of whatever it is that you are photographing. And looking at the photograph gives you an idea of what it might have been like to actually be there – but you cannot possibly ever experience it yourself.
Similarly, a model is an abstraction of reality. It cannot possibly capture all that you need to know about the real world. And using a model as a crutch to get to grips with reality is like seeing a photograph and imagining yourself there. As a thought experiment, it’s fun. As a way to reach policy decisions, it is fraught with risk.

https://econforeverybody.com/2021/03/17/the-solow-model-in-action/

A photograph is an abstraction of reality in much the same way that a story is. You could argue, in fact, that a photograph is, in some sense, a story. And whether it is Robert Lucas or I, we’re trying to get across the same point – that we try to grapple with reality by telling ourselves a story. We could do this with words, with visuals, or with equations. It doesn’t matter.

Some economists might tell you that equations is the best way to do it in all circumstances, but I’m not sure I agree. But that’s a story for another day.

But a model built using words, or visuals, or equations, or something else, is just that – a toy model of reality. Toy models are good, because they help us focus on that which we seek to understand, analyze and perhaps change for the better. They help us by removing that which doesn’t aid the analysis, and by focussing on those elements of reality which do aid the analysis.

A toy model of a race-track, for example, is an abstraction of reality. It doesn’t include the dirt and the grime on an actual race-track, it doesn’t replicate the wind, the sun and the rain, and the toy cars themselves are also simplifications of the real thing. But kids playing with a toy-model of a racetrack will agree that it is a good enough representation of reality for their purposes. We can understand that it is a racecourse, we can analyze ways by which victory can be achieved on this toy racecourse, and perhaps we can understand a little bit about how to deal with the key sections on an actual race-track by using the toy model as a reference.

Batting in the nets is a model of batting in an actual match. But as any commentator will tell you, batting in the nets is not at all like the real thing. You can conquer and master the model, sure – but never be under the impression that all your learnings from the model will guarantee a triumph out there in the real world.

In much the same way that even the most excellent of photographs can never substitute for actually being there, no amount of detail in a story can replicate actually seeing events unfold in real life. And that’s why the predictions of almost any economic model will never give you a perfect representation of what actually happens in real life. Any policy-maker will tell you this because they work in the real world, not in the ivory tower world of theory.

There’s nothing wrong with the ivory tower world of theory. It is a most interesting place, full of weird ideas, somewhat plausible hypotheses, and fascinating representations of reality.You can build a version of reality in which people have perfect foresight, for example. Or a world in which their biases trump their rationality. Or a world in which half the people have perfect foresight and the other half don’t. Or something else altogether. One is restricted by only one’s imagination, and allow me to assure you – there are some very impressive imaginations in the social sciences.

But a story, alas, can only take you so far. A story about amusement parks and central banks, for example, cannot at the end of the day be an acceptable substitute for reality:

The disadvantage with such stories, admitted Lucas, “is that we are not really interested in understanding and preventing depressions in hypothetical amusement parks . . . the analogy that one person finds persuasive, his neighbour may well find ridiculous.”
So then what to do? “Keep trying to tell better and better stories . . . it is fun and interesting and, really, there is no practical alternative.”

https://timharford.com/2023/07/what-an-amusement-park-can-teach-us-about-central-banks/

I have known two people to blog without a break, every single day, for about two decades now. A magnificent achievement, and one that is not celebrated enough, if you ask me. I try to emulate them every year, and I fail every year. But the point (I think) is to keep at it regardless, and so onwards we go.

Seth Godin is one of them. He tells a story about parsley in one of his blog posts:

Who eats the garnish? No one does. What a waste, right? But once it’s gone, you notice. You notice that there wasn’t a sprig of parsley or even a strawberry on the plate. It’s a vivid reminder that you were just ripped off.
All of us sell parsley. Sometimes, in the race to cut costs and increase speed and figure out how to fight off Wal-Mart, it’s easy to decide to leave off the parsley. No focus group ever asked for parsley!

https://seths.blog/2005/03/think_about_par/

It’s a very good story, if you ask me. A very good lesson in marketing, and one that I wish more people would adopt.

But it is, at the end of the day, a story. There might have been a dozen great things about the cafe that served Seth this meal, and there might have been ten dozen not so great things about it. Seth abstracted from his entire experience one specific point, and told us a story about it. But putting a sprig of parsley on an omelette by itself will not revolutionize your business. That’d be the wrong lesson to take away from this post. Or rather, it would be wrong on our part to assume that this is the only lesson we need.

It’s a great story, in other words, but it is, after all, only a story. And we should beware of simple stories, says the other person to have blogged everyday for twenty years:

My takeaway from my favorite bloggers is that stories help us build a version of reality, but beware of taking this, well, story too far!

I can’t tell you how excited I was to learn that Tyler was going to have a conversation with Seth. Do listen to the whole thing, or if you like, read the transcript. But once you’re done listening to the whole thing, run a search for the words “story” and “stories”. To use Seth’s phrasing, they danced with the word throughout the conversation, and that made (for me) a great conversation even better.

Tell more stories is an excellent piece of advice. Tell stories using equations, or words, or pictures, or music, or all of these and more. Revel in these stories, for they help you get a better grasp of reality. But never forget one last step: ask in what ways the story falls short of fully describing reality, and in what ways is reality more complex than the stories.

Three final points that didn’t fit anywhere else in this essay:

  1. Here is one of my all time favorite stories from economics.
  2. Is the Mahabharat the best story ever told? It is simple and complex, and it is messy and linear. It has complex characters, and the story reads well even when these characters are grossly oversimplified. It reads even better when they’re not, and is that not a point in its favor?
  3. My favorite line from Tim’s blogpost has nothing to do with economics or telling stories, but is entirely appropriate for the times we live in: “When the people are amusing themselves, they do not think about politics.“

On Enshittification

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The writer and activist Cory Doctorow has coined a memorable term for this tendency for platforms to fall apart: enshittification. “Here is how platforms die,” he wrote in January. “First, they are good to their users; then they abuse their users to make things better for their business customers; finally, they abuse those business customers to claw back all the value for themselves.”

https://timharford.com/2023/03/the-enshittification-of-apps-is-real-but-is-it-bad/

What a lovely word, enshittification. I’m sure you’ve experienced the feeling of your own favorite app/online service going down Route Enshittification, pedal to the metal. Tim Harford refers to Facebook, Instagram, Twitter and Tiktok going down this route, with his own personal experience being a witness to the slow and – as he explains later on in the blogpost – inevitable degeneration of Amazon.

The problem, Harford says, is due to two important concepts that are (at least tangentially) from the field of microeconomics: network effects and switching costs.

What are network effects? The quote isn’t my own, and I’ve forgotten where I’ve filched it from, but here’s the easiest way to understand network effects:

“The first person to buy a fax machine was an idiot. The second was a genius.”

What this means is that just the one fax machine isn’t a useful thing, at all. You need another fax machine to send a fax to. Ditto with email addresses, if you’re looking for a more modern example (well, more modern than fax machines, at any rate!). People from the technology/marketing side of things are probably more familiar with Metcalfe’s Law:

In 1985, the economist George Gilder named the idea Metcalfe’s law. It’s probably the most celebrated equation of its kind since Gordon Moore’s observation about computer chips. Metcalfe says his motivation was not science but commerce. “It was a sales tool,” he says. “People were building small networks and not finding them useful. So I ginned up a slide on an Alto that showed that the cost of a network goes up linearly with the number of nodes, but the number of possible connections goes up as the square. Our salesforce took this 35-millimeter slide and told people the reason they weren’t useful is that they weren’t big enough. The remedy, of course, was buying more of our networks.”

https://www.wired.com/story/plaintext-the-man-who-discovered-network-effects-isnt-sorry/

And what are switching costs? As the phrase itself suggests, they’re the cost of switching from one service provider to another. I’ve had a lot of reasons to be deeply unhappy with my bank over the past year or so. I’m really tempted to switch. But the very thought of having to jump through a million hoops to do so, not to mention having to think through all of the ways my life has become immeasurably intertwined with my curren’t bank’s systems, makes me not want to go ahead with it. The only option that leaves me with regard to my current bank is to bleat at them in outraged fashion once I defeat their IVR. But anyways, that’s switching costs.

Now, combine these two things – network effects and switching costs, and the result, Tim Harford says, is enshittification:

Both switching costs and network effects tend to lead to enshittification because platform providers see early adopters as an investment in future profits. Platforms run at a loss for years, subsidising consumers — and sometimes suppliers — in an effort to grow as quickly as possible. When switching costs are at play, the logic is that companies attract customers who they can later exploit. When network effects apply, companies are trying to attract customers because they will draw in others to be exploited. Either way, exploitation is the goal, and the profit-maximising playbook will recommend bargains followed by rip-offs.

https://timharford.com/2023/03/the-enshittification-of-apps-is-real-but-is-it-bad/

Well, TMKK?

  1. As Tim writes in his post, as a smart, trained-in-microeconomics consumer, go to town on all the deals that a start-up offers you. Before the enshittification process starts, and while the app is in the “let’s get network effects to work for us” stage, make sure you double down on acquiring all the freebies on offer
  2. Don’t get attached to the awesomeness of a brand. Get attached to the early stage marketing offers of all brands. Remember, economics is “the dismal science”, and the dismal conclusion from Tim’s post is that all brands will eventually enshittify themselves.
  3. Read Tim’s post, all of it. Ask yourself if you’re in favor of eliminating switching costs. Remember that the opportunity cost of eliminating switching costs is that apps won’t bother with trying to build out network effects. That means a) no mad offers at the outset, but also, b) weaker network effects on your app. There is, unfortunately, no such thing as a free lunch!

The Economist on What To Read To Understand How Economists Think

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Here’s the article, and I hope you’re able to access it.

Just in case it is behind a paywall for you, here is a quick summary:

  1. The Economist says that thinking like an economist is primarily about two things:
    1. There is no such thing as a free lunch, which is another way of saying you can never avoid opportunity costs
    2. When possible, try to put numbers on things
  2. The article then lists out five books that help you think along these lines:
    1. Capitalism and Freedom, by Milton Friedman
    2. The Worldly Philosophers, by Robert Heilbroner
    3. Africa: Why Economists Get it Wrong, by Morten Jerven
    4. Capitalism Alone, by Branko Milanovic
    5. Freakonomics: A Rogue Economist Explores the Hidden Side of Everything

I’m about to share my own list, but before I do that, a couple of points.

I’ve read the first, second and fifth book, and they’re all great books to read. I look forward to reading the other two, and the description of the fourth in particular sounds particularly exciting to my ears:

This is the book to read if you want to understand why capitalism—and economists’ way of thinking—has triumphed the world over. By the beginning of the 1990s, it was clear that the capitalist system had defeated the communist one. Today, however, many people yearn to move to a new system, such as “millennial socialism”. A left-leaning scholar, Mr Milanovic sympathises with these feelings. But ultimately he finds many radical prescriptions unconvincing. A country which tried to de-marketise on the scale envisaged by socialists would, he says, be unstable and dissatisfied in other ways. Shifting towards a much shorter working week, for instance, would leave it poorer than its neighbours. For how long would people put up with that? Capitalism is far from perfect, his book shows, yet it is hard to shake the notion that it is the only system that broadly works.

https://www.economist.com/the-economist-reads/2022/08/09/what-to-read-to-understand-how-economists-think

In a way, this reminds me of Churchill’s quote about democracy being the worst form of government, except for all the others that have been tried. And it rings true – there’s many things that we all wish could be “better” when it comes to capitalism, but one of my favorite econ questions is very apposite here: relative to what? That is, if you say capitalism is not good/not perfect, you need to answer the question “relative to what”?

Second, please don’t interpret this blogpost as a critique of the list put out by the Economist. This blogpost is very much in the spirit of “Yes, and” rather than “No, but”. But that being said, my own opinion of the main features of thinking like an economist are slightly different. I couldn’t agree more with the first feature (opportunity costs), but I do disagree with the second one. I would argue that it is entirely possible to get the most out of life without having to put a number on it. In fact, as Russ Roberts recently pointed out in a podcast, it simply isn’t possible or desirable to put numbers on some things. I haven’t read the book yet, but the podcast was instructive in many different ways. Here’s one apposite quote (Russ is answering a question by Tim about how to decide whom to marry):

Alain de Botton has a wonderful YouTube video I recommend on that; I think the title is “You’re going to marry the wrong person.” Fantastic short video. Don’t show it to my wife because she thinks she married the right person, I don’t want her to see it and depress her. But seriously, there’s no best. And part of the theme of my book is that most of life is a matrix. And by that, I don’t mean the movie, the red or blue pill. What I mean is that it’s a set of complicated attributes that are pluses and minuses for all kinds of things.
So the person you’re with, that you’re seeing now, whoever’s listening out there, there are certain levels of attractiveness, there’s a certain level of kindness, there’s a certain level of intelligence, or a certain level — many, many, many attributes. And then there’s chemistry and sexual attraction. We’ve got all those things working. And so, which is the best one? Oh, well I need a formula to add up all those measurements so I can get a single number, and then I’ll just pick the one that gets the best score. And I’d argue that’s the wrong way to think about life. It’s the wrong way to think about how to pick your friends. It’s the wrong way to think about how to find the best job. It’s the wrong way to think about most things.

https://tim.blog/2022/08/07/russ-roberts-transcript/

As I mentioned, I haven’t read the book yet – sometimes I think I should get a T-Shirt with this line printed on it. But I very much belong to the school of thought that would argue that not everything in life need be quantified.

So if I disagree with “if possible, put numbers on everything”, what according to me are the main features of thinking like an economist? If I had to pick just two, here they are (and I’m going to cheat, so there):

  1. Opportunity costs are everywhere
  2. Incentives matter
  3. Life is a non-zero sum game

Getting incentives right, and worrying about what happens if incentives go wrong ought to be part and parcel of your toolkit an an economist. And if you asked me to recommend a book about this topic, my pick would be Discover Your Inner Economist, by Tyler Cowen.

Bonus: check out the podcast between Russ Roberts and Tyler Cowen on this book.

Bonus Bonanza: reflect on the very first comment at the top of the page!

More Bonus Bonanza: Learn about callbacks.

And re: life being a non-zero sum game, I would recommend In The Company of Strangers, by Paul Seabright. If you do end up reading the book, you might end up coming away with the “complaint” that it is about much more than just life being a non-zero sum game, but in my world, that’s a feature, not a bug. But for the moment, here’s a relevant excerpt from the book:

Once bands were willing to make tentative peaceful contact with other bands, they could exchange with them, thereby enormously expanding the kinds of foods, tools, and resources to which they had access. We have evidence of exchange between hunter-gatherers from many thousands of years before the foundation of agriculture, although their lifestyle must have made such contacts sporadic and limited by comparison with the opportunities available to sedentary farmers in later millennia. Some of the oldest known symbolic artifacts, carved beads dating back over forty thousand years, may have played a role in facilitating such exchanges.7 In more recent times, the Yir Yoront aboriginals of Northern Australia had stone axes even though they lived many hundreds of kilometers from the nearest stone quarries (they exchanged stingray-tipped spears for them with neighboring tribes) and even steel ones, well before their first contact with European traders at the end of the nineteenth century. Trade allowed access not only to their neighbors’ skills but to those of their neighbors’ neighbors, and so on.

Seabright, Paul. The Company of Strangers (pp. 46-47). Princeton University Press. Kindle Edition.

And a final recommendation: please also do read The Undercover Economist and The Undercover Economist Strikes Back, both by Tim Harford.

Technology, Inflation and Day to Day Lives

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You can hardly read a news source these days without reading one article or the other about inflation. There’s plain vanilla inflation, there’s shrinkflation, and there’s skimpflation. There is, one might argue, an inflationary spiral in coining terms related to inflation!

But as students of economics, I found a recent blogpost written by Virginia Postrel quite fascinating. She speaks about inflation being a formative experience as a young person growing up in the 70’s, and for this blog post, she asked some folks who were around then to speak of their memories regarding the inflation episodes of the 1970’s.

And what made this such an enjoyable read is the fact that day to day activities and behaviors changed due to inflation. It’s one thing to speak about how prices went up, and households cut back on their expenditures. But it is quite another to speak about how the lives of ordinary people changed as a consequence of inflation:

In the late 1970s, Tom Noonan, then around 20 years old, worked in a Winn-Dixie supermarket in Louisville, Kentucky. His job was to change price tags a couple of times a week. He’d go through the store with a box cutter and a pricing gun, slicing off the old price stickers and applying the new, higher ones. It’s one of the 1970s memories that came pouring out of my Facebook friends when I asked about their experiences.
Not every store was so meticulous. Many just slapped the new prices on top of the old ones. “I half remember peeling off price labels to get a lower price (maybe on a book?), not even realizing that what I was doing was wrong or illegitimate,” confesses Mike Schiffer, a law school IT manager born in 1968, in the Facebook thread. “I don’t think I really understood how prices were set or changed at that point.”

https://vpostrel.substack.com/p/from-the-archives-remembering-inflation

Which activities, tasks and chores have changed in our lives today because of the recent bout of inflation? How does inflation manifest itself in terms of how we lead our day-to-day lives? With barcode scanners, Tom Noonan’s job no longer need exist in most (but not all!) cases, and that is a good example of how you might want to think about the intersection of inflation, technology and day to day lives.

And if you’ll allow me a brief but entertaining digression: this would also be a good time to talk about, well, barcodes:

How vast mega-stores emerged with the help of a design originally drawn in the sand in 1948 by Joseph Woodland as he sat on a Florida beach, observing the furrows left behind, an idea came to him which would – eventually – become the barcode. This now ubiquitous stamp, found on virtually every product, was designed to make it easier for retailers to automate the process of recording sales. But, as Tim Harford explains, its impact would prove to be far greater than that. The barcode changed the balance of power between large and small retailers.

https://www.bbc.co.uk/programmes/p04k0066

Not just this episode – please listen to the entire series, and purchase the book if you can. This series remains a great way to understand how our day to day lives in the modern economy are impacted in surprising ways by inventions we take for granted. Such as the barcode, for one – but on an entirely related note, also check out the episode on shipping containers:

How a simple steel box changed the face of global trade. Shipping goods around the world was – for many centuries – expensive, risky and time-consuming. But 60 years ago the trucking entrepreneur Malcolm McLean changed all that by selling the idea of container shipping to the US military. Against huge odds he managed to turn “containerisation” from a seemingly impractical idea into a massive industry – one that slashed the cost of transporting goods internationally and provoked a boom in global trade. Tim Harford tells the remarkable story of the shipping container.

https://www.bbc.co.uk/programmes/b08jbd20

Both, of course, have a lot to do with inflation today – and both are not objects that would come up in an introductory course on economics, more’s the pity.

But a useful question to think about as a student of economics today is this: which of our day to day activities today are impacted by inflation in surprising and unexpected ways? Or put another way, what would be a good Tom Noonan example from today?

Thinking about this question is a good way to think about economics, but even better, economics in conjunction with technology and better-est of all, it helps you become a keener observer of life around you. An economic naturalist, if you will.

Hearts As Well As Minds

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Tim Harford comes up with a blogpost about a topic that is very close to my heart:

Writing a few years ago in The Chronicle of Higher Education, Schwartz argued that one of the goals of a university education, especially a liberal arts education, is to teach students how to think. The trouble is, said Schwartz, “nobody really knows what that means”.
Schwartz proposes his own ideas. He is less interested in cognitive skills than in intellectual virtues.
“All the traits I will discuss have a fundamental moral dimension,” he says, before setting out the case for nine virtues: love of truth; honesty about one’s own failings; fair-mindedness; humility and a willingness to seek help; perseverance; courage; good listening; perspective-taking and empathy; and, finally, wisdom — the word Schwartz uses to describe not taking any of these other virtues to excess.

https://timharford.com/2022/07/learning-to-think-well-involves-hearts-as-well-as-minds/

And from the original essay, this excerpt:

Knowing how to think demands a set of cognitive skills — quantitative ability, conceptual flexibility, analytical acumen, expressive clarity. But beyond those skills, learning how to think requires the development of a set of intellectual virtues that make good students, good professionals, and good citizens. I use the word “virtues,” as opposed to “skills,” deliberately. As Aristotle knew, all of the traits I will discuss have a fundamental moral dimension. I won’t provide an exhaustive list of intellectual virtues, but I will provide a list, just to get the conversation started.

https://www.chronicle.com/article/what-learning-how-to-think-really-means/

There is so much to unpack in both essays that I’m not even going to bother trying to condense this down to one blogpost, and consider yourselves warned, there will be many posts in this series. Because if you are as passionate about teaching as I am (the only thing I may be more passionate about is food), this topic is always front and center in your mind.

I’d distill the implicit topic in both these posts/essays down to this question:

Should education make you a good person, or do you have to be a good person in order to be educated?

It seems like a simple question, but when you begin to think about it, you can end up spending hours on it.

Learning how to think, Barry Schwartz says, “requires the development of a set of intellectual virtues.” Which begs the question: what is virtue?

Here are two of Google’s answers (I’ve selected the two here that I think to be the most appropriate, but you can see all other answers by clicking here):

behaviour showing high moral standards | a good or useful quality of a thing (emphasis added)

Which, if you know your Pirsig, ought to remind you of a passage or two:

The one thing that doesn’t fit what he says and what Plato said about the Sophists is their profession of teaching virtue. All accounts indicate this was absolutely central to their teaching, but how are you going to teach virtue if you teach the relativity of all ethical ideas? Virtue, if it implies anything at all, implies an ethical absolute. A person whose idea of what is proper varies from day to day can be admired for his broadmindedness, but not for his virtue.

Pirsig, Robert M.. Zen and the Art of Motorcycle Maintenance (p. 338). HarperCollins e-books. Kindle Edition.

And:

Kitto had more to say about this aretê of the ancient Greeks. “When we meet aretê in Plato,” he said, “we translate it ‘virtue’ and consequently miss all the flavour of it. ‘Virtue,’ at least in modern English, is almost entirely a moral word; aretê, on the other hand, is used indifferently in all the categories, and simply means excellence.” Thus the hero of the Odyssey is a great fighter, a wily schemer, a ready speaker, a man of stout heart and broad wisdom who knows that he must endure without too much complaining what the gods send; and he can both build and sail a boat, drive a furrow as straight as anyone, beat a young braggart at throwing the discus, challenge the Pheacian youth at boxing, wrestling or running; flay, skin, cut up and cook an ox, and be moved to tears by a song. He is in fact an excellent all-rounder; he has surpassing aretê.
Aretê implies a respect for the wholeness or oneness of life, and a consequent dislike of specialization. It implies a contempt for efficiency—or rather a much higher idea of efficiency, an efficiency which exists not in one department of life but in life itself.

Pirsig, Robert M.. Zen and the Art of Motorcycle Maintenance (p. 341). HarperCollins e-books. Kindle Edition.

Or put another way, if Robert Pirsig were to edit Barry Schwartz’ essay, he would probably have edited his sentence about virtue to “requires the development of excellence”.

That is, education is very much about developing excellence (or virtue, if you insist), and in a sense, that is all it is about. Words matter, so I’d argue that you might want to think about what the word education means to you, and rather than link to Google’s results, allow me to post a screenshot instead:

https://www.google.com/search?q=define+education

Note how the first definition comes with synonyms galore: teaching, schooling, tuition, tutoring and so on. But the second definition? Just an example of the usage of the term. When, during random questions, students ask me why I enjoy teaching so much, I say that the highlight of my teaching experience are the “Aha!” moments – when you, as a teacher, can actually see a lightbulb switch on above a students face. Not, I should hasten to add, literally so, but I’m sure you know what I mean. Education is very much, to me, an enlightening experience.

And that, to me, is not the imparting of skillsets. That is a part, without a doubt, of education, but it is only a part. I do not mean to denigrate the imparting of knowledge, or skillsets. This is not about saying that giving systematic instructions about, say, the put-call parity theorem is trivial, unimportant or irrelevant. This is about saying that education is about so much more than that: it is about helping students be good.

So my own answer to my own question would be that education is very much about making a student a good person.

Ah, but then what does being good mean? As it turns out, Robert Pirsig wrote an entire book about this question, called Lila, and ended the book by saying that good is a noun. Which is a whole different story, and will take much more than a blogpost. So what we’ll do instead is focus, in future blogposts, on this topic, on the list of nine virtues that Schwartz speaks about in his essay, and tackle them one at a time.

We’ll begin with a nice easy (sarcasm alert) component of virtue: love of truth.

Icing Without The Cake

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My daughter much prefers eating the icing to eating the cake itself, and who can blame her? But, Tim Harford points out in a typically excellent column, that approach doesn’t take you very far in the field of applied behavioral economics.

Would we really have excellent universal pensions, a fit and healthy population, and a low-carbon economy, if only we hadn’t been distracted by Nudge? Of course not. But behavioural science is all too good at producing perfect icing for the policy cake; practitioners must never forget the cake itself.

https://timharford.com/2022/06/has-nudge-tempted-us-away-from-systemic-solutions/

The point of the column, and the academic paper it speaks about, is very simple: nudges are a complement to economic policies, they aren’t a substitute. And while behavioral economics, and nudges, are truly important, and relatively cheaper, they aren’t magic wands that will substitute for the time tested policies that economic theory will present.

And that is hard to disagree with!

The paper that Tim Harford refers to in his article is called “The i-frame and the s-frame: How focusing on the individual-level solutions has led behavioral public policy astray“. I’ll cover this paper and some of the points raised in it in greater detail tomorrow, but in today’s blog post, I want to cover an older paper written by them.

The paper in question is called “Putting nudges in perspective” and has also been written by George Loewenstein and Nick Chater. The paper (it’s a very accessible, short paper, please do read it) isn’t a mea culpa, nor does it excoriate behavioral economics and the power of nudges. But it does caution us, the readers, of the limits of behavioral economics and worries if the field has become a little too overrated.

First, some definitions and background. What is a nudge? Here is Thaler and Sunstein’s original definition:

Any aspect of the choice architecture that alters people’s behaviour in a predictable way without forbidding any options or significantly changing their economic incentives. To count as a mere nudge,
the intervention must be easy and cheap to avoid.

Thaler, R. H. and C. R. Sunstein (2008), Nudge: Improving Decisions About Health, Wealth, and
Happiness, New Haven, CT: Yale University Press.

Please read the book to get multiple examples of what nudges are, how they have been developed and used. It is an excellent book to read, full of great ideas. And again, Loewenstein and Chater don’t mean to suggest that there is anything wrong about the idea or the way it has been deployed. As I said, they worry about excessive dependence on the idea of nudges.

In fact, they have a useful framework in the paper, which is worth looking at in greater detail:

https://www.cmu.edu/dietrich/sds/docs/loewenstein/putting_nudges_in_perspective.pdf

What is the type of problem you’re looking to solve? That’s given along the rows of this table. And what solutions might work for these problems? Those are given along the columns. And the point of the paper is that we’ve been focusing far too much on “I” and not been thinking about whether it really is the best solution, as compared to alternatives “A” through “H”.

To use just one example: smoking. Why is smoking a problem? Broadly speaking, for two reasons. First, smoking harms the smoker, and while one might expect the smoker to be aware of this, they might well end up misestimating the risks, or they might end up preferring the immediate pleasure and ignore the long term consequences, or think that they might be able to shake the habit anytime they wish. But also, and this is the second reason, second-hand smoking is an externality that can/should be addressed.

Now, if you think about it in terms of the table above, the authors say that this means that the problem belongs to row 3 (an internality) but also to row 1 (an externality). And to the extent that you agree that tobacco companies are likely to create marketing campaigns designed to exploit the behavioral biases of their potential and current consumers, you might think that it will fall in row 2 as well.

What of the solution? Well, in a problem such as this one, the optimal response might be one in which we marry a traditional economic policy response (taxes on cigarettes) with a behavioral response (graphic advertising on tobacco packets). Just one, of either sort, may not be enough, and in fact, there is a case to be made for more than one policy response from each of the two sets. In other words, the optimal policy response most likely lies in column B-E-H, rather than A-D-G or C-F-I.

But beware:

The question of how different interventions aggregate is interesting and important. On the one hand, as perhaps illustrated by the case of smoking, it is possible that different interventions aimed at the same problem can have a super-additive effect. This could occur if, for example, a multifaceted response is more likely to result in a change in norms, or if there is some kind of threshold of apathy or complacency that needs to be exceeded for people to change their behaviour. On the other hand, multiple interventions, especially if aimed at different target behaviours, could potentially divide individuals’ attention and lead to fatigue, resentment and possibly even a consequent backlash from intervention-weary individuals.

https://www.cmu.edu/dietrich/sds/docs/loewenstein/putting_nudges_in_perspective.pdf

Bottomline: behavioral economics does have a role to play in policy-making, but it isn’t a question of either using traditional economic ideas or using behavioral economics ideas. As the authors note, behavioral problems may have as an optimal solution traditional economic solutions, and vice versa.

Or, you might say – and old timers will have been waiting for this – the truth lies somewhere in the middle!

In tomorrow’s blogpost, we’ll take a look at Loewenstein and Chater’s latest paper on the topic.

Office Layouts and Maximizing Soul

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Sometime last year, I published an essay I called Maximizing Soul. I hope you read it in its entirety, but here’s a point from that essay that will be useful for us today:

And optimization necessarily implies maximizing something, or minimizing something. Getting the most out of life can be thought of in two ways. It could mean living life to the fullest (however you might define this for your own sake). It could also mean getting the most out of life by minimizing time, effort and cost spent on any activity.

https://econforeverybody.com/2021/03/08/maximizing_soul/

In the 1960s, the designer Robert Propst worked with the Herman Miller company to produce “The Action Office”, a stylish system of open-plan office furniture that allowed workers to sit, stand, move around and configure the space as they wished.
Propst then watched in horror as his ideas were corrupted into cheap modular dividers, and then to cubicle farms or, as Propst described them, “barren, rathole places”. Managers had squeezed the style and the space out of the action office, but above all they had squeezed the ability of workers to make choices about the place where they spent much of their waking lives.

https://timharford.com/2022/04/what-le-corbusier-got-right-about-office-space/

As always, please read the whole thing, since it is about much more than just office cubicles, but that was the part that stood out for me. Maybe because I have spent some years in these cubicles, and trust me, “squeezed the style and the space out of the action office” is exactly right.

“What are you optimizing for?” is an underrated question, and we don’t ask this question of ourselves and others often enough. In the context of workplace design (and many other things, in my opinion), if your answer is that you’re optimizing for efficiency and cost, proceed very carefully. You might end up doing your job far too well, and with entirely unexpected results.

Another thing that stood out for me in that column by Tim Harford:

In 2010, the psychologists Alex Haslam and Craig Knight set up an experiment in which participants were asked to perform simple administrative tasks in a variety of office spaces. They tested four different office layouts. One was stripped down: bare desk, swivel chair, pencil, paper, nothing else. The second layout was softened with pot plants and almost abstract floral images. Workers enjoyed this layout more than the minimalist one and got more and better work done there.
The third and fourth layouts were superficially similar, yet produced dramatically different outcomes. In each, workers were invited to use the same plants and pictures to decorate the space before they started work, if they wished. But in one of them, the experimenter came in after the subject had finished decorating, and then rearranged it all. The physical difference was trivial, but the impact on productivity and job satisfaction was dramatic. When workers were empowered to shape their own space, they did more and better work and felt far more content. When workers were deliberately disempowered, their work suffered and, of course, they hated it. “I wanted to hit you,” one participant later admitted.
It wasn’t the environment itself that was stressful or distracting — it was the lack of control.

https://timharford.com/2022/04/what-le-corbusier-got-right-about-office-space/

Agency matters. If you’re working with people, trust them enough to give them agency. Sure, they’ll stumble every now and then. But when working with a team, give them leeway, and let them run with their part of the project, and that in almost all regards. It works wonders!

But won’t there be problems, I hear you ask. Well sure, but the question to ask is this: which error would you rather avoid? The error of stymieing work by putting place too many processes, or the error of mistakes being made out of sheer enthusiasm? Statistics matters!

Tim Harford on The Ease of Doing Business Report

Ashish1 Comment

But before anything else, let’s take a moment to acknowledge the title of the article – if you haven’t seen the movie, please do. One of my favorite Judie Dench movies.

You may have heard of the problems associated with the Ease of Doing Business report. (The reason I have linked to the Wikipedia page rather than the original page is because it wasn’t opening for me. Your mileage may vary.)

Even a spreadsheet can become a victim of its own success. Just ask the World Bank’s Doing Business report. While many worthy publications from the World Bank are never downloaded, Doing Business has been a smash hit for years. No longer. Amid an ugly scandal about data manipulation that has left the head of the IMF, Kristalina Georgieva, fighting for her career, Doing Business has been cancelled.
The power struggle at the top of the fund involves: a three-way tussle for influence between the US, Europe and China; rivalry between Georgieva, former chief executive at the World Bank, and the current, Trump-nominated bank president David Malpass; and domestic US politics. (Democrats have long disliked the Doing Business report’s low-regulation tone.)
The accusation is that in 2017 the World Bank’s leadership, including Georgieva, pressured the Doing Business team to improve China’s ranking in order to keep the Chinese government happy. The case for the defence is that Georgieva’s team were merely double-checking a sensitive number, that China’s ranking barely moved (from 85th to 78th), and anyway China is now ranked far better (25th) than when Georgieva was at the bank. The fight is as fascinating as it is unedifying.

https://timharford.com/2021/11/notes-on-a-statistical-scandal/

By the way, if you want to learn how to write columns well, you could do a lot worse than reading these three paragraphs.

A short, interesting sentence to begin the column, followed by an easy to read first paragraph that explains what the problem is. The next two paragraphs provide context, give additional details, and bring the reader up to speed, so that Tim Harford can get to the points that he wants to make regarding the whole issue. And contrast that with what I have managed to do so far: four paragraphs, one lengthy excerpt, and two tangential points, one of which is meta. Ah well.

But all of that aside, take some time out to read Tim Harford’s column before reading what follows.

  1. What was the report optimizing for?

    Originally, it seems to have been an attempt to help interested entities understand how easy (or not) it was to do business in a particular country. This helps entrepreneurs (domestic and international) understand some of the potential impediments to starting a business. The report lays out the processes involved in starting a business, and speaks about the length of time required to complete those process. That is surely a good thing, correct?
  2. Is a report not the same as a ranking?

    What matters more to you as a student when it comes to examinations? Are examinations a way for you to reflect upon how much you’ve learnt and what remains to be learnt, or are examinations a way to understand where you are in the pecking order? The problem with the Ease of Doing Business report wasn’t the report itself, it was the rankings that were generated on the basis of the reports.
    As Tim Harford says in his column: “But Klein has one regret: the original decision to publish an overall ranking of which countries were the best and the worst in the world for doing business. Such aggregate rankings make little sense, but they are ubiquitous because they are clickbait. The Doing Business aggregate ranking was no exception. Without it, the report would never have received so much attention. But without the ranking, it is doubtful anyone would have cared enough to try to manipulate the data.”
    And of course the inevitable followed: the rankings became more important than the report itself.
  3. A rare point of disagreement. Here is the quote from his column: “This newspaper recently celebrated the demise of the Doing Business indicators, complaining that countries were “expressly changing policies to score better”. That is a strange objection. Unless the indicators are valueless, when countries try to score better that is a feature, not a bug.”

    When Tim Harford says “this newspaper”, he is referring to the Financial Times, where he happens to be a columnist. I’m unable to access the original FT article from where this point was excerpted, but I happen to agree with excerpt above, and therefore disagree with Tim Harford. That being said, I certainly do wish that the original FT article had been worded better in the case of the sentence that we’re able to read.
    Think about that phrase up above: ““expressly changing policies to score better”.
    I think what they wanted to say was this: countries should ideally have been trying to figure out how to change policies so that in reality, on the ground, it became easier to do business. This should then have been reflected in the rankings. That would have been Utopian. Instead, policymakers and politicians in some cases tried to change the policies so that the ranking improved, without there being much change on the ground. That word, “expressly”, is doing a lot of lifting in that phrase – because all of what I have written is what I think they were trying to get at.
    Put another way, the indicators are not valueless, unless they’ve become the target. And that, really, is all that the FT was trying to say: the indicators did, in fact, become the target. Countries were more focused on the outcome (the ranking) rather than the process (has it actually become easier to do business?), and that is never a good idea.
  4. Consider this quote: “The Doing Business aggregate ranking was no exception. Without it, the report would never have received so much attention. But without the ranking, it is doubtful anyone would have cared enough to try to manipulate the data.”

    It is a question we should all be asking ourselves repeatedly: what are you optimizing for?
    In this case, was the World Bank optimizing for drawing attention to the report? We live in a world in which signaling matters, Goodhart’s Law is real and status is the name of the game. So if the World Bank was optimizing for publicity, it should have acknowledged that all of what eventually happened was a very real risk.
    But if the World Bank was optimizing for preparing a good report that stood up to scrutiny, then it should have acknowledged that the opportunity cost of such a strategy is that hardly anybody would ever read it. But such, alas, is life.

Putting the Con in Convenience

Ashish1 Comment

Do nudges work?

Yes:

Governments are increasingly adopting behavioral science techniques for changing individual behavior in pursuit of policy objectives. The types of “nudge” interventions that governments are now adopting alter people’s decisions without coercion or significant changes to economic incentives. We calculated ratios of impact to cost for nudge interventions and for traditional policy tools, such as tax incentives and other financial inducements, and we found that nudge interventions often compare favorably with traditional interventions. We conclude that nudging is a valuable approach that should be used more often in conjunction with traditional policies, but more calculations are needed to determine the relative effectiveness of nudging.

Benartzi, S., Beshears, J., Milkman, K. L., Sunstein, C. R., Thaler, R. H., Shankar, M., Tucker-Ray, W., Congdon, W. J., & Galing, S. (2017). Should governments invest more in nudging?. Psychological Science, 28(8), 1041-1055.

Which kind of nudges work best?

Perhaps the most frequently mentioned nudge is the setting of defaults, which are pre-set courses of action that take effect if nothing is specified by the decision-maker. This type of nudge, which works with a human tendency for inaction, appears to be particularly successful, as people may stick with a choice for many years (Gill, 2018).

https://www.behavioraleconomics.com/resources/mini-encyclopedia-of-be/nudge/

Is that always and everywhere a good thing? Well…

The logical extreme is the endlessly renewable subscription. Alongside the familiar bills for utilities, internet, mobile phone and mortgage, our household subscriptions include services as varied as an online yoga resource, access to all the Star Wars and Marvel movies, a Patreon campaign, wine, Amazon Prime, Microsoft Office, Adobe Photoshop, apps for mindfulness, language learning and productivity, two cloud storage services, unfettered access to BoardgameArena and a music bot on Discord.
Some of that will be incomprehensible, I’m sure; 15 years ago it would have been not just incomprehensible, but unimaginable. Yet not only are we paying for all this, we’re paying without a clear idea of when or how much the payments are, or even the method of payment we are using.
In a classic article from 2006, “Paying Not To Go To The Gym”, economists Stefano DellaVigna and Ulrike Malmendier compared consumers paying for health club membership in three different ways: with a 10-visit pass, on an annual membership and with an auto-renewing monthly subscription. The monthly consumers had more flexibility — and paid for the privilege — but they did not use it. Instead, they stayed subscribed for longer, paid nearly twice as much per gym visit and typically took more than two months to cancel after their final gym appearance. All these online subscriptions are plugging into something that health-club owners have known all along.

https://timharford.com/2021/07/why-we-lose-track-of-spending-in-a-cashless-society/

Most students I speak to are fascinated with behavioral economics, and rightly so. It’s a great way to learn at the intersection of economics and psychology, and ask how both fields of study might become better.

But it might make sense to ask if behavioral economics as a tool in less-than-perfectly-ethical hands might lead to less-than-perfect outcomes. And that is a worthy field of study too!

As an example:

Nobody is saying, least of all me, that behavioral economics is “wrong”, or “dangerous”. But I think it makes sense to realize that it is a tool, and can be misused, just like any other tool. If anything, given the very real biases and heuristics that all of us are susceptible to and use (respectively), it is perhaps more likely to be misused.

Always consider both sides of an argument, especially if you instinctively like one side more! 🙂

The Long, Slow, But Inevitable Death of the Classroom

Ashish5 Comments

If you read enough about Robert Solow, this quote coming up is but a matter of time:

You can see the computer age everywhere but in the productivity statistics

http://www.standupeconomist.com/pdf/misc/solow-computer-productivity.pdf

Much the same could be said about internet based learning technologies if you tried to measure it in colleges and universities before March 2020. We had lip service being paid to MOOC’s and all that, but if we’re being honest, that’s all it was: lip service.

Things have changed around a bit since then, I think.

We’ll get to that later on this post, but let’s go back to the seeing computers everywhere but in the productivity statistics bit for the moment. Paul David, an American economist, wrote a wonderful essay called “The Dynamo and the Computer: An Historical Perspective on the Modern Productivity Paradox“, back in 1990.

I think of this essay as an attempt to respond to the question Robert Solow had posed – why isn’t the data reflecting the ubiquitousness of the computer in the modern workplace? Read the essay: it’s a very short, very easy read.

Paul David draws an analogy between the move away from steam as a source of power, back at the end of the 19th century.

In 1900, contemporary observers well might have remarked that the electric dynamos were to be seen “everywhere but in the productivity statistics!”

David, P. A. (1990). The dynamo and the computer: an historical perspective on the modern productivity paradox. The American Economic Review, 80(2), 355-361.

Adjusting to a new technology, it turns out, takes time.

Steam-powered manufacturing had linked an entire production line to a single huge steam engine. As a result, factories were stacked on many floors around the central engine, with drive belts all running at the same speed. The flow of work around the factory was governed by the need to put certain machines close to the steam engine, rather than the logic of moving the product from one machine to the next. When electric dynamos were first introduced, the steam engine would be ripped out and the dynamo would replace it. Productivity barely improved.
Eventually, businesses figured out that factories could be completely redesigned on a single floor. Production lines were arranged to enable the smooth flow of materials around the factory. Most importantly, each worker could have his or her own little electric motor, starting it or stopping it at will. The improvements weren’t just architectural but social: Once the technology allowed workers to make more decisions, they needed more training and different contracts to encourage them to take responsibility.

https://slate.com/culture/2007/06/what-the-history-of-the-electric-dynamo-teaches-about-the-future-of-the-computer.html

Again, please read the whole thing, and also read this other article by Tim Harford from the BBC, “Why didn’t electricity immediately change manufacturing?” The article, by the way, is an offshoot of a wonderful podcast called “50 Things That Made The Modern Economy“. Please listen to it!

But here’s the part that stood out for me from that piece I excerpted from above:

“Eventually, businesses figured out that factories could be completely redesigned on a single floor. Production lines were arranged to enable the smooth flow of materials around the factory. Most importantly, each worker could have his or her own little electric motor, starting it or stopping it at will.”

https://slate.com/culture/2007/06/what-the-history-of-the-electric-dynamo-teaches-about-the-future-of-the-computer.html

Colleges and universities are today designed around the basic organizational unit of a classroom, with each classroom being “powered” by a professor.

Of the many, many things that the pandemic has done to the world, what it has done to learning is this:

each worker learner could have his or her own little electric motor personal classroom, starting it or stopping it at will.

In fact, I had a student tell me recently that she prefers to listen to classroom recordings later, at 2x, because she prefers listening at a faster pace. So it’s not just starting or stopping at will, it is also slowing down or speeding up at will.

Today, because of the pandemic, we are at an extreme end of the spectrum which describes how learning is delivered. Everybody sits at home, and listens to a lecture being delivered (at least in Indian universities, mostly synchronously).

When the pandemic ends, whenever that may be, do we swing back to the other end of the spectrum? Does everybody sit in a classroom once again, and listens to a lecture being delivered in person (and therefore synchronously)?

Or does society begin to ask if we could retain some parts of virtual classrooms? Should the semester than be, say, 60% asynchronous, with the remainder being doubt solving sessions in classroom? Or some other ratio that may work itself out over time? Should the basic organizational unit of the educational institute still be a classroom? Does an educational institute still require the same number of in person professors, still delivering the same number of lectures?

In other words, in the post-pandemic world…

How long before online learning starts to show up in the learning statistics?

Additional, related reading, for those interested:

  1. Timothy Taylor on why “some of the shift to telecommuting will stick“
  2. An essay from the late, great Herbert Simon that I hadn’t read before called “The Steam Engine and the Computer“
  3. “The role of computer technology in restructuring schools” by Alan Collins, written in 1990(!)