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An undercover economist on sex, logic & life

When you meet such a guy, you say he is different. Meet Tim Harford, a Financial Times columnist and author of The Logic of Life and The Undercover Economist.

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Economists normally like to talk about the graver things in life, like the impending recession, the perils of deflation, the current financial crisis and so on. But what would you say about an economist who talks about things that happen in everyday life? Things like Starbucks and the coffee that it serves; or why are people paid more as they go up the hierarchy, even though the amount of work they do comes down. He even writes that “Oral sex is definitely in vogue.”

When you meet such a guy, you say he is different. Meet Tim Harford, a Financial Times columnist and author of The Logic of Life and The Undercover Economist.
“I’m just describing the economic ideas that I see all around me. I think that if economics is a useful way of looking at the world, that usefulness is bound to emerge in everyday life — and it does,” says Harford.

Any business goes through the dilemma of whether to charge higher prices and run the risk of losing customers or cut prices and gain them. How do businesses get around this?
One of my favourite examples is Starbucks’ “short cappuccino”, the coffee that dare not speak its name. Starbucks will sell you this cappuccino, and there’s always a button on the cash register. But it is never on the menu board.

This is an example of what economists call “product sabotage.” Cheaper products are often hidden, packaged unattractively, or even have their functions disabled, in order to prevent richer or more demanding customers from trading down. Starbucks’ strategy is simple, but in the tech industry, it is routine to see software sold cheaply or given away with disabled functions, and even in hardware, consumer-focused printers or digital cameras are sometimes professional versions with their functions disabled. It’s cheaper to make them that way and it allows businesses to serve both markets.

Why are people paid more as they go up the hierarchy, when the amount of work they really do comes down?
This is the famous “tournament theory”. The idea is that corporations reward their executives the same way that organisers of tennis tournaments do: not for absolute performance but for performance relative to each other.
That makes sense. In both cases, absolute performance is hard to measure and influenced by luck (such as wind and rain, or recession). But the implication of such a scheme is that each promotion brings you closer and closer to the ultimate prize: a huge bonus and no serious work obligations at all. If you weren’t overpaid at the top, it wouldn’t be much of a prize, would it?

You write in your book The Logic of Life,  that oral sex is definitely in vogue. What is the explanation? What has basic economics got in this?
I argue in The Logic of Life that the most unexpected people in the most unexpected situations are making rational decisions and responding — albeit unconsciously - to costs and benefits. The “oral sex epidemic” is in fact a “safe sex epidemic”. When you look carefully at the data you realise that teenagers in the US are not, in fact, simply more sexualised. They lose their virginities later and are more likely to use condoms.
Everything points to later, safer sex in response to increased knowledge of the risk of AIDS and other sexually transmitted infections. As for the basic economics: if the price of Coke goes up, people drink Pepsi. If the risks of regular sex go up, people switch to oral sex, which is safer.

Addictive goods can be more sensitive to price changes. So given this, when the price of booze increases, alcoholics are the ones who cut down most on their drinking. How do you explain this as conventional wisdom would suggest that alcoholics are the least likely to cut down on consumption, given the fact that they are addicted to alcohol?

If alcoholics were rational — meaning that they understand they’re addicted and think about the implications of that —then they would realise that every drink today increases the risks of taking a drink tomorrow. (“Cold turkey” is the rational way for an addict to quit.) Crunch the mathematics and you see that this makes rational addicts more responsive to price changes than non-addicts. The question is, is the “rational addict” a fantasy: not at all. The behaviour predicted by the theory comes across clearly in the data. Addicts also respond to expected future price changes: a forthcoming rise in tobacco taxes persuades cigarette smokers to quit immediately, not to wait until the tax rise kicks in. This is not to say that all addicts are rational, but that the rational choice model has something to say, even about addiction.

Do people spend their lives looking for the right person who fits into their financial, social, emotional and sexual realm of things? Or do they just make do with what is available?
Two researchers, Michèle Belot and Marco Francesconi, persuaded speed dating companies to share their data. Belot and Francesconi recently published their research with the intriguing title, “Can anyone be The One?” The answer, I’m afraid, is “just about anyone, yes.”

They studied 3,600 people at 84 speed dating events. They were able to see who went to which event, and who liked whom. Some of the findings weren’t surprising: women seem to be choosier, proposing a match half as often as men. It will shock nobody to hear that tall men, slim women, non-smokers and professionals received more offers.

But what might raise the odd eyebrow is the discovery that speed-daters systematically change their standards depending on who shows up for the speed date. Although women prefer tall men rather than short men, on evenings where nobody is over six feet, the short guys have a lot more luck. Most people prefer an educated partner, but they will propose to school drop-outs if the PhDs stay away.

If people really were looking for a partner of a particular type, we would expect them to respond to the absence of such people by heading home with a disappointed shrug and hoping for better luck at the next speed date. Instead, people respond to slim pickings by lowering their standards.

Why do people choose to live in tiny apartments in big cities like New York, London, Tokyo or even Mumbai for that matter, when they could just sell up and move to a much bigger place in a smaller town or city? Is there a rational explanation for this?
They’re there partly to learn from others, and partly because cities are such fun. You can see evidence for the “learning” idea clearly in the data: people’s wages are strongly linked to how long they’ve lived in a big city, whether or not they still do. When they move to the country, wages stop rising so quickly; when they move back to the city, the sharper wage rises resume.

You recently wrote on your website, “Not everything that seems like a bargain will really end up saving you money.” What are the lures and tricks companies use to make consumers spend more?
There are too many to list! (Check out my website: timharford.com and look for “Bargains That Aren’t” to see them all.) But one interesting example is that companies will introduce a highly-priced product not because they think it will sell, but to make other options seem more moderate. One experiment, conducted by marketing professor Itamar Simonson, showed this at work. He showed that when people were offered the choice between a cheap and an expensive camera, more people chose the expensive camera if they were also offered a very high-priced, over-specified camera as a third, “luxury” option. Compared with the luxury camera, what had seemed expensive suddenly seemed like a moderate option.

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