Tag Archives: Economics

Being wrong, and a partial list of ways I’ve been wrong

August 28, 2010 By in Personal, Philosophy Tags: , , , , , , , Leave a comment

A variety of somewhat big-deal econ bloggers have written about things they now believe they were wrong about. Looking back on changed opinions (which is a slightly more polite of saying “I was wrong”) is a useful exercise in intellectual honesty—a trait most people lack. I might be among them but like to think that I’m more intellectually honest than I actually am.

Still, here are some (unsorted) opinions on topics about which I’ve been wrong or at least not as right as I could be:

1) I basically believed that the stock market’s average rate of return would remain 10% per year over reasonable time periods. That it will still average somewhere close to 10% per year still seems probable, but the “reasonable time periods” (like two decades or so) no longer does, and in the long run, as a famous economist whose name escapes me observed, we’re all dead.

2) Like McArdle, the “Great Moderation” seemed real up until the last six months or so.

3) There are some things I was wrong about that turned out well: I didn’t think we’d see a black president in my lifetime. In 2004, if you’d told me that a black man would be president in 2008, I probably would’ve laughed at you.

4) I didn’t get why people liked Jane Austen until I read James Wood’s How Fiction Works, with its description of free indirect speech, and his examples from Austen. Now I do.

5) The iPhone? Nice, but a fad. I didn’t think it would be as important as it has been, or that other phone manufacturers would be so slow to respond.

6) I didn’t think Facebook would become and stay as popular as it is; I signed as an undergrad chiefly as a quick way of figuring out which girls already had boyfriends. Now I seldom log on, but evidently I’m in the minority.

7) I used to believe that it was possible to have rational discussions about religion and/or politics with most people. Now I don’t. Both subjects is are seldom subjected to empirical tests, so no feedback mechanism can demonstrate when or if a belief is wrong. Politics are (slightly) more subject to such tests, via election, studies, and the like, but the broadest political beliefs aren’t really. See Paul Graham’s “Keep Your Identity Small” for more on this subject, along with “What You Can’t Say.” At best one can have meta-conversations about religion and politics (“Why do people need religion?”)

8) During the ramp-up to the Iraq war, I was in college, and many of my professors were virulently against the war and thought that the government was perfectly capable of dissembling and distorting the debate about weapons of mass destruction; some had lived through Vietnam, with its phony Gulf of Tonkin incident, and the later Iran-Contra hearings. I hadn’t and thought it wildly implausible that so many people and institutions would be hoodwinked by faulty information, so I was more or less in favor of the war, like a lot of my equally gullible compatriots.

Oops.

9) On first reading Carlos Ruiz Zafón’s The Shadow of the Wind, I didn’t appreciate many of its most impressive qualities, especially regarding the narrative, the dialogue, and the extent to which the novel combines post-modern games with immense readability. Now I do.

10) I used to think that the sexual double standard was primarily due to misinformation, the cruel application of religious principles to individual lives, ignorance, and malice. Now I think the sexual double standard is primarily due to daughter-guarding by parents and parents’ influence on culture, female efforts to guard men through slandering their potential competitors’ reputations, general female competitiveness, the fact that the choosier sex is always the one that invests more in offspring, and differing economic and pleasure incentives acting on children than their parents.

These forces help explain a great deal of our culture’s confusion about sexuality and its mixed messages—especially among the young. I used to think this confusion would eventually devolve into a more laissez-faire, I’m-okay-you’re-okay attitude, which it still might, but now that day seems very far off.

(See my essay “The Weekly Standard on the New-Old Dating Game, Hooking Up, Daughter-Guarding, and much, much more” for details.)

11) A student question from two years ago prompted me to realized that, although I used to believe something close to the classical economic model of man in which behavior automatically reveals preferences and if someone does something, it must be because they rationally believe it will benefit them, now I’ve realized that context, framing effects, peer pressure, time preferences, and the like have a far greater effect than I once gave them credit for. Reading Dan Ariely’s Predictably Irrational, Philip Zimbardo’s The Lucifer Effect and The Time Paradox, Neil Strauss’ The Game, and Tim Harford’s The Logic of Life contributed to my change in views.

It might not hurt for you to try this test for yourself: if you can’t think of anything you’ve been wrong about, does that mean that you’re consistently right about everything, or does that mean something quite different? If you need help, there’s an entire book on the subject by Kathryn Schulz named Being Wrong: Adventures on the Margins of Error, although I haven’t actually read said book yet.

Being wrong and a partial list of ways I’ve been wrong

August 28, 2010 By in Personal, Philosophy Tags: , , , , , , , 5 Comments

A variety of somewhat big deal bloggers in economics have written about things they now believe they were wrong about. Looking back on changed opinions (which is a slightly more polite of saying “I was wrong”) is an exercise in intellectual honesty—a trait widely lacked.

Some (unsorted) things I’ve been wrong about:

1) I basically believed that the stock market’s average rate of return would remain 10% per year over reasonable time periods. That it will still average somewhere close to 10% per year still seems probable, but the “reasonable time periods” (like two decades or so) no longer does, and in the long run, as a famous economist whose name escapes me observed, we’re all dead.

2) Like McArdle, the “Great Moderation” seemed real up until the last six months or so.

3) There are some things I was wrong about that turned out well: I didn’t think we’d see a black president in my lifetime. In 2004, if you’d told me that a black man would be president in 2008, I probably would’ve laughed.

4) I didn’t get why people liked Jane Austen until I read James Wood’s How Fiction Works, with its description of free indirect speech, and his examples from Austen. Now I do.

5) The iPhone? Nice, but a fad. I didn’t think it would be as big a deal as it has been, or that other phone manufacturers would be so slow to respond.

6) I didn’t think Facebook would become and stay as popular as it is; I signed as an undergrad chiefly as a quick way of figuring out which girls already had boyfriends. Now I seldom log on, but evidently I’m in the minority. Pictures of dogs, food, babies… I don’t care but the evidence shows many, many people do.

7) I used to believe that it was possible to have rational discussions about religion and/or politics with most people. Both subjects are seldom subjected to empirical tests, so no feedback mechanism can demonstrate when or if a belief is wrong. Politics are (slightly) more subject to such tests, via election, studies, and the like, but the broadest political beliefs aren’t really. See Paul Graham’s “Keep Your Identity Small” for more on this subject, along with “What You Can’t Say.”

8) During the ramp-up to the Iraq war, I was in college, and many of my professors were virulently against the war and thought that the government was perfectly capable of dissembling and distorting the debate about weapons of mass destruction; some had lived through Vietnam, with its phony Gulf of Tonkin incident, and the later Iran-Contra hearings. I hadn’t and thought it wildly implausible that so many people and institutions would be hoodwinked by faulty information, so I was more or less in favor of the war, like a lot of my equally gullible compatriots.

9) On first reading Carlos Ruiz Zafón’s The Shadow of the Wind, I didn’t appreciate many of its most impressive qualities, especially regarding the narrative, the dialogue, and the extent to which the novel combines post-modern games with immense readability. Now I do.

10) I used to think that the sexual double standard was primarily due to misinformation, the cruel application of religious principles to individual lives, ignorance, and malice. Now I think the sexual double standard is primarily due to daughter guarding by parents and parents’ influence on culture, female efforts to guard men through slandering their potential competitors’ reputations, general female competitiveness, and the fact that the choosier sex is always the one that invests more in offspring.

These forces help explain cultural incoherence about sexuality, especially among the young. A laissez-faire, I’m-okay-you’re-okay attitude seems very far off.

(See “The Weekly Standard on the New-Old Dating Game, Hooking Up, Daughter-Guarding, and much, much more.”)

11) A student question from two years ago prompted me to realized that, although I used to believe something close to the classical economic model of man in which behavior automatically reveals preferences and if someone does something, it must be because they rationally believe it will benefit them, now I’ve realized that context, framing effects, peer pressure, time preferences, and the like have a far greater effect than I once gave them credit for. Reading Dan Ariely’s Predictably Irrational, Philip Zimbardo’s The Lucifer Effect and The Time Paradox, Neil Strauss’ The Game, and Tim Harford’s The Logic of Life contributed to my change in views.

Try the “What I’ve been wrong about” test for yourself. If you can’t think of anything you’ve been wrong about, does that mean that you’re consistently right about everything, or does that mean something quite different? If you need help, see Kathryn Schulz’s Being Wrong: Adventures on the Margins of Error, although I haven’t actually read said book yet.

My new hero and The Hollywood Economist

March 9, 2010 By in Life Tags: , , , , , , , 1 Comment

“Paramount studio head Robert Evans has described [screenwriter Robert Towne] as ‘lethargic, scattered, perpetually late.’ ”

Towne is my new hero.

The quote is from Edward Jay Epstein’s The Big Picture: Money and Power in Hollywood, which is fascinating throughout, though not as much as his newer The Hollywood Economist: The Hidden Financial Reality Behind the Movies, which shares much of the same DNA (by which I mean anecdotes and facts) and goes a long way towards explaining why so many movies are so awful. It also shows how Hollywood is about deals just as much as hedge funds are, how studios use those hedge funds, and how studios need to project an aura of profligacy while counting down to the last dollar. One thing of many that I didn’t know: how vital insurance companies are to making movies.

$20 Per Gallon: How the Inevitable Rise in the Price of Gasoline will Change Our Lives for the Better — Christopher Steiner

August 21, 2009 By in Books, Essays, Reviews Tags: , , , , , , , , , , , 3 Comments

One major problem of $20 Per Gallon isn’t just the book itself, but its ancestors. Christopher Steiner argues that a) oil prices will rise like an Atlas rocket and b) that such a rise will result in people flocking to dense, urban cities, the return of manufacturing to the United States, and a host of cultural changes. But neither proposition is as certain as he implies, and Steiner comes from a long line of environmental doom-sayers. Books like Paul R. Ehrlich’s The Population Bomb—a best-seller in the 1970s—make Malthusian arguments that have proven wrong over the last 40 years. They predicted catastrophe, not iPods and the Internet.

Still, just because someone was incorrect about a past prediction doesn’t mean that a current prediction will be wrong; there’s probably a name for this kind of bias beyond “boy-who-cried-wolf-syndrome.” But the argument that $20 Per Gallon might be wrong goes deeper, as shown in Tad Friend’s “Plugged In: Is the electric car the future?” from this week’s New Yorker. Friend’s answer is “maybe,” which isn’t much of a surprise given the technological, infrastructure, and economic challenges surrounding electric vehicles. But if oil prices spike high enough, the switch might be painful and rapid—which could drive oil prices back down as demand drops. We saw something similar happen in the summer of 2008, when oil usage plummeted in response to higher prices. And judging by the amount of investment going into electric and hybrid vehicles, it’s not impossible imagine that climbing oil prices will lead people beyond those who want to show their environmental conscientiousness to buy them, resulting in exurban sprawl and a lifestyle not so different for most people, rather than the wholesale urban changes Steiner predicts.

Predictions about the end of the world or drastic changes to it have been so popular that Simon Pearson even wrote A Brief History of the End of the World: Apocalyptic Beliefs from Revelation to UFO Cults, which covers the history of people who predict the end of the world, or at least civilization (so far, their track record isn’t so hot, but many post-apocalyptic novels are fun to read). Steiner is more upbeat, seeing higher gas prices improving the world, and that part is refreshing and makes his work different from someone like Ehrlich’s.

Still, oil prices might not climb all that high in the immediate future. Although Steiner says “We have hit what’s popularly known as peak oil, meaning that global production of crude is at a zenith that will never again be realized,” Friend says, “It troubles [Elon] Musk [founder of Tesla Motors] that while few people know that the world’s oil supply could plateau by 2020 and run out as early as 2050, nearly everyone knows that electric cars suck.” Given the two sources, I would tend to trust the New Yorker’s famously fastidious fact-checkers over Steiner. Still, the Wall Street Journal reports today that Oil Prices Hit 2009 High. Based on this flurry of recent news, is Steiner more right or wrong? It depends on what happens to the market. People who think they know what will happen and bet accordingly will win or lose big. Some will presumably end up demonstrably wrong, like Ehrlich. Steiner cites an airline consultant who says “oil […] is bound to reach [eight dollars per gallon] within three or four years.” I wonder if someone will remember to call him on it then.

So the obviousness that Steiner argues just isn’t there. I’ve come to that conclusion in part because the book doesn’t break new ground or bring enough existing information together to make a compelling and new argument. If you’re familiar with the work of economist Edward Glaeser or writer Richard Florida, both of whom have often been cited in The Atlantic, you know where Steiner’s coming from. Florida even writes for the magazine, while Glaeser contributes to the New York Times’ Economix blog. Too much of $20 Per Gallon is going to be redundant or superfluous for anyone familiar with Glaeser and Florida’s work. To be worthwhile, a book needs to have such depth and such a strong animating idea that it must have hundreds of pages to flesh out its major ideas. Lately I’ve criticized a number of nonfiction books for that failing that test, including Rapt, America’s War on Sex, and The Secret Currency of Love.

In $20 Per Gallon, there’s also a troublesome undercurrent of snobbery that runs through, and a sense that Steiner looks down on the proles who like kitsch and SUVs for reasons other than economics, but those views are cloaked in economic arguments. In an aesthetic sense I’m more or less with Steiner, but he makes poorly supported arguments like this one:

According to some of American automakers’ own market researchers, the type of people who tend to buy SUVs are insecure and vain. They’re people who frequently are nervous about their marriages and uncomfortable about having become parents. They have little confidence in their skills as drivers.

The source for this? Two writers who also have a strong enough point of view to make me doubt their own research: Brian Hicks and Chris Nelder, who wrote Profit from the Peak: The End of Oil and the Greatest Investment Event of the Century. As I tell freshmen: you have to go back and find the primary research material if you’re going to cite extravagant or unusual claims. I want to believe Steiner’s argument about people who drive SUVs in part because I don’t, and his argument flatters my own prejudices, which is nice. But the analytic side of my mind doesn’t buy it. He also says that the vast McMansions that were in vogue until February 2009 “will be an entrapment, an entrapment to giant utility bills and the attachment to a dwelling unit that will, with time, become a kind of pariah.” His financial argument is probably sound: spending vast quantities of money on a signaling device like a distant house isn’t playing smart financial defense. I don’t want to live in one. But because of the hybrid and electric car argument above, Steiner might be wrong on the basic affordability of McMansions, even if he remains right in his unstated view that they’re gaudy, ugly, and likely to fall apart.

The basic problem with $20 Per Gallon is that if you’ve read this post and followed most of the links, you now know more about the issue that the book describes than the book itself tells you. Someone would probably be better off subscribing to The Atlantic and The New Yorker than they would reading $20 Per Gallon, since those magazines do a better job of dealing with issues surrounding oil prices and their consequences than Steiner does here. A lot of that work is online. Go find it there. Once you have a map to finding it, you don’t Steiner to do the work for you.

The Secret Currency of Love — Hilary Black

February 20, 2009 By in Books, Essays Tags: , , , , , , , , , , , 2 Comments

A Time magazine interview called “The Truth About Women, Money and Relationships” with Hilary Black, the editor of The Secret Currency of Love: The Unabashed Truth About Women, Money, and Relationships inspired me to buy the deceptively titled book, which has little if any truth in it and no useful financial advice save that it’s not a bad idea to play defensively with one’s cash, lest it come to affect other aspects of one’s life. As Terry Teachout recently quoted from Dickens’ David Copperfield: “Annual income twenty pounds, annual expenditure nineteen nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.”

Black solicited essays about money from a bunch of women and published the results, which are less than the sum of their parts. The confessional tone man adopt often seems forced, as one’s partner might after having paid for an hour or two of time, and the reductive nature of the problems—am I selling out? If so, should I? And why is it so nice to sell out?—grates by halfway through; you’re better off reading the interview and skipping the book, thus avoiding the trap I fell into. Black says, “One thing I noticed over the many years I worked at More was that although people often wrote about divorce and Botox and sex, they didn’t really talk about money in a way that was as profound or exploratory.” That’s still true. To read profound and exploratory discussions about money, try Dan Ariely’s Predictably Irrational and Tim Harford’s The Logic of Life. Or, hell, try Flaubert’s Madame Bovary and Martin Amis’ Money, which tell you more about the issue through fiction than The Secret Currency of Love does through superficial fact.

The openings of two essays might help convey the genteel banality, which smother, like wrapper over an eggroll, the insight that genuinely exists in sections of The Secret Currency of Love:

I didn’t have a regular cleaning lady until I was thirty-seven years old. I would have loved to be free of the daily drudgery of sweeping, dusting, and the Saturday scrubbing of the toilet, but paying another person to clean up my mess felt wrong. Overindulgent. Spoiled. Excessively first world.

(Ah, the joys of wealth: worrying about how one’s wealth functions on a symbolic level more than on a practical level. Is the overly examined life really worth living?)

Some women wake up at forty-five and realize they forgot to have children. I realized I forgot to make money.
I’ve never given much though to personal finance. Truth be told, it hasn’t been a serious problem: I’m grateful I’ve never had to worry about having enough or finding a place to sleep. Nor has money ever been a major goal, accomplishment, or dirty secret: I did not get an M.B.A. or go public with a company, and I don’t worry about having to hide my wealth for fear of attracting the wrong friends.

Another woman opens with a generic-seeming description of a playdate for a son at a new school, only to find that the friend’s family is loaded to the point of Google-level wealth. And it’s hard to care about another fish out of water story, or another story about the tortures of picking between money and love. Although each essay is well-written in a way that lets the seams show, many authors tell tales of financial deprivation by way of their profession, since writers are not as a rule remunerated highly. Consequently, I begin to suspect a sample bias problem: writers are, tautologically, better at writing than most people; the editor needs writers to fill a book about money; therefore, the nature of the people who offer their services affects the content even more than usual. Writers are often conflicted about commerce and thus are more likely to feel the schism when others would simply take the money—or not. And many of the contributors have absorbed the idea that writing in an unheated garret is romantic and that money is corrupting, which makes their relationships to money more tortured that those relationships perhaps need to be.

This essay’s tone is critical, and perhaps overly so, since The Secret Currency of Love is nonetheless instructive in showing that many people, even the wannabe bohemians, have more uncertainty about how income shapes us than they might admit under other circumstances. It would be nice to have enough money to live above it, like someone who has taken their company public or someone who has inherited enough not worry, but even that is fraught with intellectual and perhaps corrupting peril.

There are clever bits, which come chiefly at the beginning, when the repetitiveness of the problems suffered hasn’t yet drawn one’s attention to where the next essay starts rather than where this one is going, as when Abby Ellin writes:

In other words, I live life on my own terms.
The only problem with this lifestyle is that “freedom” is generally just another word for “nothing left to deposit.”

In which case, are you really free? I get the sense that one is paging Virginia Woolf and A Room of One’s Own. More recently than Woolf, Philip Greenspun dealt with the same issue in his unfair but still fascinating essay “Women in Science:”

In the personal domain, young people are very different from old people. If you interview old people and ask “What are the greatest sources of satisfaction and happiness in your life?” almost always the answer “my children” comes back. At the age when people are choosing careers, the idea of having children is often unappealing and certainly few have the idea that one should choose a “kid-friendly” career. Old people, on average, also have higher income requirements than young people. A youngster is happy to backpack around the globe, stay in youth hostels for $20 per night, and sleep in a tent. Most oldsters become devoted to their creature comforts and get cranky in anything less than $200 per night private hotel room. Young people don’t mind one $400 per month room in a dingy 4BR apartment shared with three or four other young people; most oldsters need their own apartment or house (edging up towards $1 million in America’s nicer neighborhoods).

The long blockquote might seem irrelevant, but because of the age of the contributors to The Secret Currency of Love, I suspect that their choices in career and other terms have come to seem less sagacious in retrospect than they were at the time such choices were made. Hence the fear of penury, the desire for a family, and the fact that, as Greenspun says elsewhere, “Any resource that is scarce, such as real estate, is snapped up by society’s economic winners.” Writers are seldom among that group.

Alas: I suspect that reading Greenspun’s essay along with a regular dose of The Atlantic would be more instructive and insightful regarding money, as well as innumerable other subjects,than The Secret Currency of Love. Don’t be fooled by an alluring topic—underneath its cosmetic marketing, the book is fundamentally shallow.

Mid-July links

July 12, 2008 By in Books, Culture, Links Tags: , , , , , , , , , , Leave a comment

* More Wood here, by way of a few blogs. See my last post here. Find How Fiction Works here.

* I’d love to think that reading helps one become less socially awkward, as argued here. Repeat after me: correlation is not causation. But the article gives an example of how readers of a New Yorker story did better on social reasoning tests than those given a random essay, and this research complements that done on fiction and empathy.

As for the original claim, I will say that, speaking from experience, if reading helps one become less socially awkward, it certainly took a long time for the effect to kick in around these parts.

* I’d forgotten about The Literary Book of Economics: Including Readings from Literature and Drama on Economic Concepts, Issues, and Themes, but it complements the econ-for-dummies books I like and gives numerous examples of the intersection of economics and literature, since the two express one another more often than many of their respective practitioners think.

* Maybe I was too quick to dismiss the possible value of film as an agent of social change. This link courtesy of Freakonomics. Besides, in my post on The Devil’s Candy, I went into an extended rhapsody about Friday Night Lights, so perhaps I should be wary of too much bashing, despite Twilight of the Books.

(Before I concede too much, however, I’ll ask for the the paper detailing people’s tendency to protest the government thanks to T.V., or how T.V. is a medium easily monopolized by the powerful, as in Russia.)

* Speaking of film, this time combined with politics, Frank Rich in The New York Times has a great column that further explains why it’s hard for me to get ideologically attached to political parties in the U.S. or excited about politics:

You have to wonder what these same kids make of the political show their parents watch on TV at home. The fierce urgency of now that drives “Wall-E” and its yearning for change is absent in both the Barack Obama and McCain campaigns these days.

* You might notice that links having little if anything to do with books go at the bottom of link posts, today isn’t an exception. Clive Crook writes about education and immigration idiocy. Fortunately, this is an issue both parties can be wrong about, further explaining why I find it impossible to affiliate with either.

Predictably Irrational — Dan Ariely

February 26, 2008 By in Books, Culture Tags: , , , , , , , , , , , , , , , 11 Comments

One of the central tenets of economics is that we behave rationally, and yet much of what we see on a day-to-day basis defies rationality like some Modernists defy the conventions of plot. We become irrationally attached to concepts like “free,” even if something else is a better value, and our price preferences are relative: experiments in Dan Ariely’s Predictably Irrational show that we’re willing to forgo what seems to be a better deal just so we don’t have to risk even tiny amounts of money. These tendencies can be manipulated to some extent; Ariely says that the main lesson that could be distilled is that “we are pawns in a game whose forces we largely fail to comprehend.” I disagree with the chess metaphor, as it seems to deny us the will and ability we have to learn about the game and not move forward just one square at a time, but the thought it expresses is accurate, and throughout the book I could think of parallel examples to the ones Ariely gives. We don’t see the blindness in others as well as ourselves, and we become attached to prices, things or ideas.

I remember turning 21 and being able to drink legally for the first time and being shocked at the price of going to bars; parties in college and high school usually charged three to five dollars for a cup and as much beer as you could drink. Girls got in free. If the door guy raised the price from three to five, I would try negotiating and sometimes leave. If I came with a group of attractive girls, which wasn’t often, I’d sometimes get in free. In contrast, at bars five dollars only gets you the first beer; to be fair, however, that beer is usually of higher quality than keg beer. Nonetheless, the price increase of an evening out caused much consternation at first, but now I’ve acclimated to the idea that, although Ariely says “[…] first decisions resonate over a long sequence of decisions,” I also use anchoring points in my price expectation continuum. Now paying $15 to $20 at a bar seems normal and $5 at a party would seem cheap. These “anchors” can change over time and with context. If I went to New York or L.A., where trendy bars allegedly now charge $15 a drink, I’d be astonished. When I was a freshman in college and a New York club accidentally gave me a band that allowed me to drink even though I was 18, I was shocked at having to pay $10 per drink and consequently didn’t drink much, even when a 23-year-old girl wanted to get me to buy shots. Buying her shots isn’t a good idea for reasons Richard Feynman goes into in Surely You’re Joking, Mr. Feynman! Nonetheless, I’m wandering far afield from the central point, which is that original decisions about price can resonate powerfully over time and can be hard to change.

Ariely uses Starbucks versus Dunkin’ Donuts as an example: Dunkin’ Donuts coffee was and probably still is much less expensive than Starbucks and, I would argue, not much worse if it is at all, but Starbucks still manages to charge millions of people three or more dollars for various drinks. They can do so in part because they’ve changed expectation through decor, drink names, and the like. “Starbucks did everything in its power […] to make the experience feel different—so different that we would not use the prices at Dunkin’ Donuts as an anchor, but instead would be open to the new anchor that Starbucks was preparing for us.” In other words, Starbucks created a new anchor. This raises fundamental questions about the nature of things like supply and demand—or, as Ariely says, “As our experiments demonstrate, what consumers are willing to pay can easily be manipulated, and this means that consumers don’t in fact have a good handle of their own preferences and the prices they are willing to pay for different goods and experiences.” I agree to some extent, as I didn’t like paying extra money to go to bars and avoided it to the extent I could when I first turned 21, but now all my friends go and they’ve become the new norm. In the land of companies, Apple might be the best example of a company manipulating consumer expectations: only its operating system and industrial design separates it from other manufacturers, and yet it can get away with offering unusual machines and limited, premium product lineup.

I wonder if Ariely has read Trading Up: The New American Luxury, which describes how some companies are trying to harness these price point anchors—and redefine them. One point of Trading Up, however, is that the new or luxury products must have at least some technical advantage of what they replace. Starbucks does: it offered espresso drinks when, to my knowledge, they were not readily available at most places. Not surprisingly, the book also covers Apple and BMW. Apple offers a real technical advantage to me in the form of OS X, but you can’t buy a regular desktop tower and separate monitor. Where Apple does compete it offers hardware at prices similar to competitors, but you can’t get low-cost towers stripped of the computer equivalent of bells and whistles. In addition, this morning Apple released new versions of its MacBook and MacBook Pro laptops. The base-level MacBook is $1,100—or, thanks to Apple’s marketing, $1,099—but comes without a DVD burner, an extra gigabyte (GB) of RAM, and the extra 40 GB hard drive. Its processor is also slower. Given these drawbacks, it makes sense to buy the $1,300 version—but Apple’s website touts that the MacBook starts at $1,099. Yet buying the middle version is better, for resale value if no other reason. In doing so, the company might have differentiated itself enough to set new anchors for many consumers. And we either fall for it or make a rational choice, depending on one’s perspective.

Ariely doesn’t specifically cover Apple because he’s more interested in experiments where you have two things that are absolute equivalents, rather than OS X versus Windows. But I begin to see examples of some of his thinking in the world I see. There are limits to manipulation—I won’t pay $10 for coffee or $2,000 for any computer with the capabilities of a present-day MacBook. But I might pay marginally more for some products, like beer, depending on the setting and my age. In addition, product preferences change; in Ariely’s next chapter, “The cost of zero cost,” he describes how people will often take free even when it appears to be a better value to take money. He offered a $10 Amazon gift certificate for free or a $20 gift certificate for seven dollars. Buying the larger certificate nets more profit, but most people take the free one. To conventional economics, this would seem irrational, but for some people an Amazon gift certificate might not be of as much use as cash; they might not read much, or want to buy DVDs, and the like. In essence, I believe their demand is lower on the demand curve for Amazon products. I would take the $20 certificate because I buy too much from them already. In addition, he describes how Amazon’s free shipping policies can cause people to buy more than they would otherwise to reach the $25 free shipping threshold, but I often will add an extra book to reach it because I always have a backlog waiting. Not all those who act in response to Amazon’s offer act irrationally.

Still, the issues of Amazon gift certificates and free shipping are mostly nitpicks. My bigger question concerns some of his methods for generating data—many of the stories and anecdotes come from experimenting on convenient undergraduates at good Universities, who might not be representatives of the general population. Though he follows up many with experiments elsewhere, I’m still leery of drawing overly broad conclusions based on limited samples. In addition, how reliably can we extrapolate data from a limited number of people in artificial settings and then apply it to the bigger world? Posing the question is much easier than answering it, and to Ariely’s credit he has given us a framework for exploring the issue, while I throw popcorn from the sidelines and offer stories about drinking. But the issues are real, and there’s a perpetual danger of finding a correlation that works only to discover that some other variable drives the correlations or causes experiments to turn out as they do. Will our tendency to cheat and steal more when dealing with abstractions for cash rather than cash itself, as Ariely describes in “The context of our character, Part II,” really scale up to the level of Enron-style fraud? He makes a convincing case, but not one beyond all reasonable doubt, even if I can certainly agree that he meets the lower legal standard of a preponderance of the evidence.

And even if some of his conclusions make you go, “Really?”, his book is still fun to read. The chapters I discussed in-depth were just a small part of Predictably Irrational, and to give every chapter the same treatment would lead to a document almost as long as his book. But maybe I’m inclined to like his book more because Tim Harford recommend it (in addition, Ariely sent me an e-mail about my Harford post, and, as often happens with famous authors, I have a slight tendency towards being star-struck. But I can also admit that, perhaps alleviating some of its effects). In “The effect of expectations,” he describes experiments that show “When we believe beforehand that something will be good, therefore, it generally will be good—and when we think it will be bad, it will be bad.” He finds the influences go deep, and that signaling that an experience will be good can often make it good. Compare this, however, to Chris Matthews’ advice that one was better served by setting expectations low and exceeding them than setting them high and missing, even if the ultimate result was the same. He discussed politics, however, and Ariely is describing, well, something more domestic and more grand at the same time. I feel like there is a way to reconcile the views even if I have not found it yet, and it might speak to the depth of both writers that I have not been able to (incidentally, you should read Mattews’ Hardball).

Harford’s signal that this book will be good has an impact on the pleasure I derive from reading it, and I can’t help comparing The Logic of Life and Predictably Irrational, given their similar subject matter and proximity in both publishing date and my reading. Arguably, Harford is the better writer, with more journalistic zing, but this tendency also gets him into trouble: he jumps without transitions from idea to idea too often, and his chapters seem more loosely linked than Ariely’s. To be sure, both books are similar in that their chapters are more or less independent, but Ariely’s passes what I now call “the blog test” in that its content doesn’t seem to have been replicated on blogs and its form is not necessarily better suited to that medium. The buffet approach in Predictably Irrational by its nature lacks total coherence, but also allows one to skip chapters at will and not lose much. It also makes generalizing about an entire book more difficult, which is why I focused on particular chapters. The largest difference between The Logic of Life and Predictably Irrational is that the former makes the case for logic and rationality in a larger, social, macro sense, while the latter makes the case for irrationality in a smaller, individual, micro sense. And yet I can’t help but wonder if the latter approach supports the former approach, much the same way that the self-interest of capitalism might end up altruistically benefitting society on a large scale, or the way we might not be able to predict how an individual will act but can sometimes guess how large bodies of individuals turn out. Take two people with different SAT scores and you can’t know that one will do better than the other, but take 100,000 people with very different scores and you’ll know that most of the top group will outperform most of the bottom. So too, maybe, with Ariely’s Predictably Irrational on the small scale and Harford’s The Logic of Life on the larger. Both books also have a self-help aspect to them in that if you can understand your own weakness and how others will behave, you’ll be more likely to correct those weaknesses and exploit them in others. Of course, if enough people read both books, then their behavior could change en masse, leading to the books changing what they seek to measure, but this seems unlikely. Ariely knows about the issues with weakness, too: “[…] these results suggest that although almost everyone has problems with procrastination, those who recognize and admit their weakness are in a better position to utilize available tools for precommittment and by doing so, help themselves overcome it.”

Perhaps that is also true of readers of what I call, tongue-in-cheek, econ-for-dummies books.

Many of Ariely’s chapters are structured like this post: they tell a story, conduct an experiment, and then draw more general conclusions. The story could be a personal one from Ariely or drawn from another source. In my case, I tell a story, link it to Ariely’s experiments, and then draw a more general conclusion about his book and methods. Mostly, I suspect his book shows that we don’t really know what we want, which probably shouldn’t be a surprise given all the lonely hearts columns, uncertainty, regret, and the like we collectively experience. As such, it helps us better evaluate what we want and why we act the way we do, and that the book is fun to read helps as well. And it has enough substance to fuel more than 2,000 words of commentary and analysis.

NOTE: Ariely will be in Seattle tomorrow night, and I’ll be at Town Hall to hear him.For more about Ariely and behavioral economics, read What Was I Thinking? The latest reasoning about our irrational ways, an excellent New Yorker article, or this much shorter post on Marginal Revolution. Finally, the Economist’s Free Exchange has a very negative review that I think is wrong, as my comments above should illustrate. Its biggest complaint seems to be that Ariely doesn’t define what he means by rational, but if the writer missed that, I’m not sure he understood the book.For a descriptive but positive view, see The New York Times’ story, which is in the science rather than books section.EDIT: Dan Ariely’s visit was excellent, and I wrote about it here.

The Logic of Life and Tim Harford in Seattle

February 6, 2008 By in Books, Culture, Links Tags: , , , , , , , , 7 Comments

Tim Harford’s The Logic of Life is another book intended at least in part to capitalize on the success of Freakonomics, which has sold a bazillion copies and been translated into numerous languages (I saw its distinctive cover in Hebrew). Economics are at work: one thing sells, people realize that previously unrealized demand exists, and then rush into the market. “Rush” is a relative term for the publishing industry, as Freakonomics came out in 2005. Since then, you’ve heard the steady beat: Tyler Cowen’s Discover Your Inner Economist hit a few months ago, and Dan Ariely’s Predictably Irrational: The Hidden Forces that Shape Our Decisions is due February 19. I’m sure more will follow. The same thing happened with Da Vinci Code clones, and the fantasy section of the bookstore has novels like The Name of the Wind and worse lining itself shelves. Those comparisons aren’t entirely fair: there’ve been poorly executed books about conspiratorial secret societies for a long time, and if I recall correctly Edmund Wilson mocked one in a essay. Although Tolkien has inspired hundreds of thousands of lousy novels about Elves who speak as if coming straight from King Arthur’s Court, he is also partly responsible for His Dark Materials and The Earthsea Trilogy.

Maybe it’s unfair to describe so much of the apparatus around Harford’s book prior to the book itself, but all that digression sets up a point, which is that The Undercover Economist is interesting enough on its merits to check out from the library but not so interesting that it’s worth buying. The largest problem is that much of its content is already available online in one form or another: you can read Harford on his blog, or get similar stories from Marginal Revolution (Tyler Cowen, its author, also wrote Discover Your Inner Economist), or go back to Freakonomics or its blog. Plus there’s Steven Landsburg’s More Sex Is Safer Sex: The Unconventional Wisdom of Economics and Robert Frank’s The Economic Naturalist: In Search of Explanations for Everyday Enigmas. So we have three blogs and five books with overlapping content. The blog components are free: you don’t have to be an economist to begin asking the question, “If I’m interested in the subject, why am I buying the book?” A few days ago, Slate posted a Harford article called Amazing Racism that covers similar ground to “Chapter Six: The Dangers of Rational Racism.” Marginal Revolution is hosting a discussion on The Logic of Life, which you can read about here and here, for example. The combination of Harford’s website, Marginal Revolution, and Freakonomics don’t complement The Logic of Life—they substitute for it.

Overall, The Logic of Life is enjoyable enough but never mind-blowing, as something like A Farewell to Alms was—it reoriented the way I perceive aspects of the world. The Logic of Life just piled on the econ-for-dummies stack. Harford is a good writer but his style—pithy, and scattered, yoking together concepts like metaphysical poets but without their artistry—is better suited for the magazines and newspapers he usually publishes in than he is for a book. The magazine and newspaper articles are naturally short, pithy, and to the point, and Hardford is often very funny when he doesn’t have to extend humor that works well in 800 words to a book of more than 40,000. The book feels more like a series of blog posts than a book, which is yet another reason to read the econ blogs, because its chapters are held together only by the tenuous thread of finding something that appears “irrational” and then showing how it makes more sense than it might first appear. As an introduction to some aspects of game theory it’s okay, but the feeling of disjointedness persists even within sections: in Chapter Two: Las Vegas: The Edge of Reason, the narrative skips from a Las Vegas hotel dateline to a discussion of the history of math and game theory to Camp David in September 1961 to Thomas Schelling more generally. Yet those individuals threads aren’t fully developed and don’t come together well.

The two great heroes of this book are Thomas Schelling and Gary Becker. The latter has a blog whose general tone is modeled on the Congressional Budget Office annual report and both are Nobel Laureates. They both also blurb the book, as does Tyler Cowen and Stephen Dubner who co-wrote Freakonomics. Suddenly I find myself commenting on the material around the book more than the book itself yet again, but that’s because 1) I can’t escape the feeling of being pulled into a marketing ploy and 2) find the book largely made redundant by other available material. Consequently, I will reiterate that this isn’t a bad book, and it’s lively enough to keep the reader moving from one idea to the next, but it’s also not terribly original in content or in packaging. I mention “packaging” because that’s what the book essentially is: repackaging of academic work for a non-specialist audience. This is undoubtedly a useful service for those who, like me, are unlikely to read economics journals, but it’s not as useful for those who, like me, are likely to read economics blogs for laypeople. In fact, I must have read too many blog entries because I just used the term “laypeople.” Sorry for that, I’ll try not to let it happen again. It’s the sort of thing Harford avoids, but at the cost of depth—and the cost seems too high. The Logic of Life is too simple and the kinds of material it contains too readily available elsewhere to make it a good purchase.

If The Logic of Life does anything really well, it’s in Harford being a cheerleader for an important and too-often-overlooked field. He was a professor, cheerleader, and pub friend at the University Bookstore in Seattle on Jan. 30, where he told stories, acknowledged the weaknesses in trying to see a rational world when ours isn’t always, and questioned his own metaphors. As a speaker he was fun and also speculated that the the econ-for-dummies books I generally like have done well because “people feel like they’re learning something about the world without having to know hard maths.” Note the “s” on “maths”—Harford is British, and made a joke about how he’s been studying America since being here. I asked what he noticed, and he launched into a short and thoughtful response about how our presidential election system is more rational than he first thought because early voters in Iowa and New Hampshire have a great incentive to learn about the candidates, who in turn advise the rest of the country. I wonder if Harford has read The Myth of the Rational Voter. Its content hasn’t been replicated online.

The Wages of Destruction: The Making and Breaking of the Nazi Economy

December 23, 2007 By in Books Tags: , , , , , , , , 1 Comment

Adam Tooze describes the inner workings of how Nazi Germany came to be in The Wages of Destruction: The Making and Breaking of the Nazi Economy, a book detailing the trade-offs Germany made and the unprecedented extent to which Germany’s entire economy was reshaped intentionally and solely into a war machine. Tooze clarifies the enormous amount senior leadership knew and understood about the economic problems facing Germany and, in response, their willingness to feed people into the war machine in return for manufactured products. In addition, The Wages of Destruction shows the extent to which Hitler gambled on so-so odds in France and won, briefly, and then further gambled and lost. The win came from an extraordinary combination of the military’s skill in invading France and the inept allied response to it, while the loss came from trying to apply the same thinking to the Soviet Union. The German and occupied territory economies simply lacked the production and resources to fight multiple-front wars. All this is demonstrated with copious detail—the book’s strengths are its weaknesses in that it is relentlessly technical, and what I write by necessity lacks the evidence Tooze presents to make his case.

Recent history is largely a history of Germany’s aggressive wars, which shaped and continue to shape the world; it is hard not to see the offspring of World Wars I and II in many guises, from the current problems in the Middle East to international relations to art (the book to read is David Andelman’s A Shattered Peace: Versailles 1919 and the Price We Pay Today). In looking back, it is easy to read earlier art in terms of later developments: in The Rest is Noise: Listening to the Twentieth Century, Alex Ross gives this description of Wotan, the protagonist of Wagner’s Ring cycle: “He resembles the head of a great bourgeois family whose livelihood is destroyed by the modernizing forces that he himself has set in motion.” This is not far from what happened to Hitler, who oversaw the linking of primal fears, modern technology, and nationalism, creating what can only vie with Communism as the worst disease of the century.

This book has been part of my larger history kick, as The Pursuit of Glory: Europe 1648 – 1815, A Farewell to Alms, and From Dawn to Decadence: 500 Years of Western Cultural Life 1500 to the Present show. All three, like The Wages of Destruction, synthesize an enormous amount of the ideas and events that have wrought the world, from attitudes to culture to politics to technology to art. I say “art” intentionally because so much is caught up in the struggle of individuals against societies, the effort to retain individuality in the face of history, and the struggle of nations (it is also hard not read the larger world into art). Historical fiction rests on these ideas and often occurs at these turning points, where we know that the hero of a novel cannot change the historical event which is about to occur. Although individuals destinies might be shaped in such narratives, grand historical sweeps cannot be altered by such characters. To me this causes many narratives to be unsatisfactory and thus demands that they must focus on the small to succeed, or the world of the individual. Yet the appeal is continual, as the idea of the past is reshaped through the present and through additional evidence in both fiction and nonfiction. The Wages of Destruction is the latter and puts World War II into the larger context of economic systems.

Most of all, The Wages of Destruction is an exploration of the most fundamental idea of life and economics: we all face trade-offs at every level of existence, from the personal in a minute-by-minute sense to the national and world levels. The Nazis made numerous trade-offs favoring war and military spending, and despite their extreme ideology they could not escape from history or from the reality that they could not destroy large parts of German society and simultaneously do their utmost to defeat their enemies. Some commentators have noted that the primary world power of virtually any age is marked chiefly by its pluralism and willingness to provide tolerance, especially tolerance relative to others; by that standard, the U.S., Britain, and Rome before it have done relatively well. The numerous counter-examples toward plurality are well-known, as all three societies practiced slavery and numerous other horrendous practices, but at least two of the three trended toward liberalism, while Rome reached its zenith thanks to its republican beginnings. By contrast, Nazis tremendously damaged their economy by expelling and imprisoning large numbers of people and causing other nations to stop trading with the Germany bloc, and while Tooze shows the extent to which slave and imported labor helped the regime, it could not make up for the enormous disruptions it caused.

This common theme of slavery differs in that the Nazis moved towards it long after Britain and the United States had repudiated it. All three relatively liberal societies—Rome, Britain, the U.S.—were able to succeed in large part because they did what the Nazis would not: choose for the material betterment of their people and choose to incorporate more of their people into their economies and societies. Germany chose the opposite and paid, giving up living standards that Tooze demonstrated were already lower than most of Western Europe and the United States, a chance at real victory, and much more to their ideology of death and racial purity. Still, without ideology the Nazis would not have launched their attacks on Europe and the world. The United States and Britain chose pluralism. The Nazis faced trade-offs in their hatred for Jews; although the regime actively tried to convince Jews to emigrate in the 1930s, it made actually leaving difficult by forcing Jews to abandon their assets—especially hard currency—behind. This occurred because Germany had an enormous balance of payments problem, meaning the country paid out more money every year for imports than they sold in exports, constraining their financial system and their ability to implement their racial purity goals. Consequently, the Nazis prevented Jews from leaving thanks to their hard currency problem, as Tooze explains in the “Breaking Away” chapter detailing the financial crises during the early part of Hitler’s administration.

These financial crises made rearming all the more expensive, forcing consumer trade-offs, which were extreme, particularly in light of Hitler’s rhetorical striving for parity with the United States. The lives of most Germans were close to what we would associate with the nineteenth century; food and textiles consumed much of the population up through the middle of the war, when a massive amount of imported and often slave labor supplemented the tight German market. A massive portion of the population suffered from the lack of an export market combined with Hitler’s ceaseless redirection of money toward armaments. Germany was not particularly mechanized, either, and its army also wasn’t, and the demolition of these ideas about the modernity of Germany make this a fascinating and revisionist book. One section notes that “the rate of attrition amongst their motley collection of vehicles [tanks and supply trunks] had been high” in 1939 and only accelerated afterwards. Germany’s auto industry before the war was not particularly well-developed, and the overarching theme in Germany’s war planning from the late 1930s onward was fear of the United States’ industrial power. Germany also lacked raw material, particularly steal and oil, and Tooze shows that steel in particular limited production, as the necessity of armaments production brought their economy ever closer to the Soviet Union’s, despite Hitler’s antipathy toward Communism. This makes his alliance of convenience with the Soviet Union all the stranger given the Nazis’ fixation on ideology, and demonstrates further the paradoxical nature of the regime. The Wages of Destruction focuses on these numerous paradoxical aspects, their relationship to the Nazi economy, and their effect on the war, ultimately leading to the effects that still reverberate in the world.

The New York Review of Books has a good if characteristically lengthy essay about The Wages of Destruction here, although it is in a walled garden. Richard Evans is not as enthusiastic as some other reviewers:

Tooze is saying nothing very new [about Nazi civilian employment efforts]; and his claim to be overturning an entrenched orthodoxy that puts civilian job-creation at the center of the Nazi economic recovery has to be taken with a pinch of skepticism. Similarly, although he suggests that the evidence he presents for the recovery beginning in the late summer of 1932 […] “contradicts all subsequent portrayals of the German economy under National Socialism,” the fact is that economic historians have long known that the Nazis were lucky in their timing, taking over the German economy just as it was beginning to come out of the Depression.
What his book does offer is a mass of evidence that finally puts these arguments beyond dispute. Hitler’s drive to rearm was so obsessive, so megalomaniacal, that he was prepared to sacrifice almost everything to it.

Note the phrase “a mass of evidence”—the dense notes cite numerous sources, and this is a book more likely to be cited than read, given its pounding if necessary detail. The synthesis and conclusion sections may be slightly too short because of Tooze’s details, but such issues do not mar an otherwise good book.

After reading this, take a look at this short post about the modern monsters in North Korea, where the New York Philharmonic says it will play.