Tag Archives: Tyler Cowen

College graduate earning and learning: more on student choice

October 31, 2011 By in Academia, Culture, Teaching Tags: , , , , , , , , 2 Comments

There’s been a lot of talk among economists and others lately about declining wages for college graduates as a group (for example: Arnold Kling, Michael Mandel, and Tyler Cowen) and males in particular. Mandel says:

Real earnings for young male college grads are down 19% since their peak in 2000.
Real earnings for young female college grads are down 16% since their peak in 2003.

See the pretty graphs at the links. These accounts are interesting but don’t emphasize, or don’t emphasize as much as they should, student choice in college majors and how that affects earnings. In “Student choice, employment skills, and grade inflation,” I said that colleges and universities are, to some extent, responding to student demand for easier classes and majors that probably end up imparting fewer skills and paying less. I’ve linked to this Payscale.com salary data chart before, and I’ll do it again; the majors at the top of the income scale are really, really hard and have brutal weed-out classes for freshmen and sophomores, while those at the bottom aren’t that tough.

It appears that students are, on average, opting for majors that don’t require all that much effort.

From what I’ve observed, even naive undergrads “know” somehow that engineering, finance, econ, and a couple other majors produce graduates that pay more, yet many end up majoring in simple business (notice the linked NYT article: “Business majors spend less time preparing for class than do students in any other broad field, according to the most recent National Survey of Student Engagement [. . .]”), comm, and other fields not noted for their rigor. As such, I wonder how much of the earnings picture in your graph is about declining wages as such and how much of it is really about students choosing majors that don’t impart job skills of knowledge (cf Academically Adrift, etc.) but do leave plenty of time to hit the bars on Thursday night. Notice too what Philip Babcock and Mindy Marks found in “The Falling Time Cost of College: Evidence from Half a Century of Time Use Data:” “Full-time students allocated 40 hours per week toward class and studying in 1961, whereas by 2004 they were investing about 26 to 28 hours per week. Declines were extremely broad-based, and are not easily accounted for by compositional changes or framing effects.”

If students are studying less, maybe we shouldn’t be surprised that their earnings decline when they graduate. I can imagine a system in which students are told that “college” is the key to financial, economic, and social success, so they go to “college” but don’t want to study very hard or learn much. They want beer and circus. So they choose majors in which they don’t have to. Schools, in the meantime, like the tuition dollars such students bring—especially when freshmen and sophomores are often crammed in 300 – 1,000-person lecture halls that are extraordinarily cheap to operate because students are charged the same amount per credit hour for a class of 1,000 as they are for a seminar of 10. Some disciplines increasingly weaken their offerings in response to student demand.

Business appears to be one of those majors. It’s in the broad middle of Payscale.com’s salary data, which is interesting given how business majors presumably go into their discipline in part hoping to make money—but notice too just how many generic business majors there are. The New York Times article says “The family of majors under the business umbrella — including finance, accounting, marketing, management and “general business” — accounts for just over 20 percent [. . .] of all bachelor’s degrees awarded annually in the United States, making it the most popular field of study.” That’s close to what Louis Menand reports in The Marketplace of Ideas: “The biggest undergraduate major by far in the United States is business. Twenty-two percent of all bachelor’s degrees are awarded in that field. Ten percent of all bachelor’s degrees are awarded in education.” If all these business majors graduate without any job skills, maybe we shouldn’t be all that surprised at their inability to command high wages when they graduate.

I’d like to know: has the composition of majors changed over the years Mandel documents? If so, from what to what? Menand has some coarse data:

There are almost twice as many bachelor’s degrees conferred every year in social work as there are in all foreign languages and literatures combined. Only 4 percent of college graduates major in English. Just 2 percent major in history. In fact, the proportion of undergraduate degrees awarded annually in the liberal arts and sciences has been declining for a hundred years, apart from a brief rise between 1955 and 1970, which was a period of rapidly increasing enrollments and national economic growth. Except for those fifteen unusual years, the more American higher education has expanded, the more the liberal arts sector has shrunk in proportion to the whole.

But he’s not trying to answer questions about wages. Note too that my question about composition is a genuine one: I have no idea of what the answer is.

One other major point: if Bryan Caplan is right about college being about signaling, then there might also be a larger composition issue than the one I’ve already raised: people who aren’t skilled learners and who don’t have the willingness or capacity to succeed after college may be increasingly attending college. In that case, the signal of a college degree isn’t as valuable because the people themselves going through college aren’t as good—they’re on the margins, and the improvement to their skillset is limited. Furthermore, colleges universities aren’t doing all that much to improve that skillset—see again Academically Adrift.

I don’t know what, if anything, can be done to improve this dynamic. Information problems about which college major pay the most don’t seem to be a major issue, at least anecdotally; students know that comm degrees are easy and other, more lucrative degrees are hard. There may be Zimbardo / Boyd-style time preference issues going on, where students want to consume present pleasure in the form of parties and “hanging out” now at the expense of earnings later, and universities are abetting this in the form of easy majors.

This is the part where I’m supposed to posit how the issues described above might be improved. I don’t have top-down, pragmatic solutions to this problem—nor do I see strong incentives on the part of any major actors to solve it. Actually, I don’t see any solutions, whether top-down or bottom-up, because I don’t think the information asymmetry is all that great and consumption preferences mean that, even with better information, students might still choose comm and generic business.

Mandel ends his post by saying, “Finally, if we were going to design some economic policies to help young college grads, what would they be?” The answer might be something like, “make university disciplines harder, so students have to learn something by the end,” but I don’t see that happening. That he asks the question indicates to me he doesn’t have an answer either. If there were one, we wouldn’t have a set of interrelated problems regarding education, earnings, globalization, and economics, which aren’t easy to disentangle.

Although I don’t have solutions, I will say this post is a call to pay more attention to how student choices and preferences affect education and earnings discussions.

EDIT: See also College has been oversold, and pay special attention to the data on arts versus science majors. I say this as someone who majored in English and now is in grad school in the same subject, but by anecdotal observation I would guess about 75% of people in humanities grad schools are pointlessly delaying real life.

What success looks like: A link from Dave Winer of Scripting News

May 10, 2011 By in Briefly Noted, Links Tags: , , , , , , , , , , Leave a comment

I’ve been reading Dave Winer’s blog Scripting News since long before I’d heard the word “blog.” Scripting News been covered in Say Everything: How Blogging Began, What It’s Becoming, and Why It Matters and countless other profiles as one of the early examples of a blog. Imagine my delight when:

Yes, that’s a link my post on the sad and stupid demise of Flip at the hands of Cisco. I wouldn’t call Winer’s Retweet “a dream come true” or any other phrase that should be reserved for acts of extreme achievement or copulation (which can sometimes be an extreme achievement), but it’s certainly gratifying—like getting e-mails or comments from writers and critics I admire.

Now I only need a link from Marginal Revolution and my blogging life will be, if not complete, then at least substantially more satisfying than it might be otherwise.

The Great Stagnation: How America Ate All The Low-Hanging Fruit of Modern History,Got Sick, and Will (Eventually) Feel Better — Tyler Cowen

January 26, 2011 By in Nonfiction, Reviews, status Tags: , , , , , , , , , , 10 Comments

Tyler Cowen’s The Great Stagnation: How America Ate All The Low-Hanging Fruit of Modern History, Got Sick, and Will (Eventually) Feel Better is, at $4.00, cheap and packed with ideas that have been circling Marginal Revolution for some time. The mix includes the trajectory of history, the current economic crisis, technology, and economics. These might sound like disparate topics, but they come together, and Cowen summarizes the current economic crisis this way: “We thought we were richer than we were” (emphasis his). The book is an attempt to explain why we, collectively, operated under this delusion and what continuing to operate under it might entail. Note that The Great Stagnation is only available on the Kindle and is blessedly short: you won’t find the kind of padding that would be necessary to make a traditional, commercial book. I wonder if he will write one or two more of these booklettes (for lack of a better term—do we really want to call them “Kindle shorts” or something like that?) and eventually publish the collection through traditional channels as well.

This description from Reihan Salam, pointed to by Cowen, is a good one: “I’m wary of summarizing [The Great Stagnation] — I really want you to read it for yourself — but the basic idea is very straightforward: Americans have grown accustomed to painless, automatic increases in prosperity.” I think this main point leaves out the idea of technological innovation as something underlying the fact that “Americans have grown accustomed to painless, automatic increases in prosperity,” but the point is good enough to observe.

Nonetheless, one unstated idea in The Great Stagnation is that by learning about the idea of stagnating industrial economies, we might learn how to get out of them. Cowen has one answer, which is to raise the social status of scientists (this is always a good idea but seems improbable to me: admiring athletes and celebrities seems like a nearly universe behavior). Once alerted to this large-scale danger, we might be able to take small-scale steps to get out of it. One might be to combine Cowen’s description of slowing technological change, which he explains thoroughly, to Steven Berlin Johnson’s Where Good Ideas Come From.

Johnson says good ideas often spring from the “adjacent possible” and that the idea of pure, lone genius may in some ways be overwrought. Notice the important weasel words in that sentence: Johnson is not opposed to the idea of genius, but it is not his chief concern. If we’re going to get more people together in the dense clusters that might lead to the major innovative breakthroughs necessary to power the economy, the solution might be to find a system or systems to implement some of Johnson’s major ideas. Universities already do a reasonably good job of this, but there may be other ways. For example, I imagine that Johnson would favor the idea of cities without major height restrictions, which would allow more people to interact and exchange ideas while spending less commuting time. I don’t think it a coincidence that Salam also thinks about transportation issues; he says “Commuting and congestion should be taken much more seriously then they are at present. Long commutes are a big source of misery for individuals and families” but mentions telecommuting as a possible solution. For many kinds of jobs I think that impractical; larger cities more amenable to families (through, for example, 50 story buildings with four bedrooms in each unit) might be a better option. If gas prices get high enough, this may become necessary, and it will have the side benefit of possibly increasing the number of Johnson’s adjacent possibles.

Cowen touches on how World War II may influence current American expectations. America was protected during World War II, while Europe destroyed itself; memories of the destruction are much more alive on the continent, which may lower their expectations for material success. I would have liked more of a discussion on how World War II may have driven scientists, artists, and others to the United States and thus driven some of the applied prosperity from 1945 – 1973. Is that part of the “low-hanging fruit” that is much discussed? If so, how great a component is it? Other aspects of immigration policy may have helped the U.S. in that regard too. Did the Immigration and Nationality Act of 1965, which, according to Oliver Wang, “created preference categories for science, math and engineering-trained immigrants to come over” lead to a substantial advantage to the United States in technology? Incidentally, the act in turn favored Asians with strong math and science backgrounds, which may be part of the reason Asians are stereotyped with strong skills in those areas.

One chapter deals with the Internet and how much it lessens the overall costs of fun while employing a relatively small number of people. Computers do an extraordinary job of leveraging the talents of a single highly skilled person; this is part of Paul Graham’s point in “How to Make Wealth” and “Inequality and Risk.” If politicians want to redistribute wealth because there won’t be as many spoils from growth, as Cowen as they are and will be tempted to do, they will largely be doing it from the kinds of people Graham is talking about. Graham is also unusual because he is putting his money and mouth where his time is through the creation of Y Combinator, a startup incubator / funder premised around the idea that a small number of people can have a disproportionately lucrative or effective tech business. So far Graham appears to be right. The very lean startups he funds probably employ relatively few people compared to large, existing companies, and they also provide the kinds of “cheap fun” Cowen writes about. If they’re not employing relatively unskilled people, who will? Possibly no one, except perhaps the Federal government; hence the zero marginal product ideas that have been discussed by Cowen and others. But if the cost of fun is cheaper, from the perspective of an individual we might be frustrated, but not as worse off as we might otherwise be.

Although Cowen doesn’t say this, the whole world might be moving toward a university model, where the people who are having ideas (professors) do not capture very much of the economic benefit of those ideas. The people who have lots of Facebook friends or who get many people to watch YouTube videos derive little income from those activities but still like to do them. Professors obviously derive some income, but most people with the tenacity and intelligence (in that order) to get through a PhD program and become a tenure-track or tenured professor could probably earn more elsewhere. But if this kind of thinking and these kinds of life choices—trading income for prestige and raw knowledge—become more pronounced throughout the economy, it may lead to lower tax revenues and make people who like traditional kinds of consumption (cars, houses, vacations) less happy than they would otherwise be. There would be less money to pay off special interest groups. People who like writing blog posts to the point of doing so for no effective payment, like your correspondent, are probably better off thanks to the Internet, which Cowen identifies as the major technological innovation of the last 30 years.

So using the Internet may take the place of other kinds of (expensive) consumption. Still, how satisfying is the Internet “fun” compared to other kinds? I would guess more satisfying than TV but perhaps not as satisfying as other kinds, which books like Hamlet’s Blackberry or Nicholas Carr’s The Shallows discuss. Does checking Facebook or e-mail 20 times a day make most of us better off, or do we have some kind of quasi-information addiction going on that leaves us hollow, like a conventional addiction of the coke / alcohol kind? I lean towards the Cowen large net benefit view but think the Hamlet’s Blackberry and “Disconnecting Distraction” view merit attention.

One other thing is worth noting: Cowen is more positive than normative. This is refreshing, since many people are primarily trying to write unsatisfying or simplifying polemics or argue about how a pie should be distributed instead of how to increase the pie’s size or why the pie looks like it does. Distribution makes some better off at the expense of others and may worsen status inequalities that often make people unhappy. Growth makes everyone better off. He is not overtly political, as when he describes how modern bureaucracies are enabled by record keeping and dissemination technologies. Such technologies can be deployed to great much larger organizations:

Despite the anticorporate bias of some left-wing thinkers, the New Deal and Progressive era initiatives were a direct result of the growth of big business and the rise of a consumer society. Big government and big business have long marched together in American history. You can call one good and the other bad (depending on your point of view), but that’s missing their common origin and ongoing alliance

He also observes:

Given that bubbles have popped in just about every asset market, and in many different countries, we can only understand the financial crisis by looking at some pretty fundamental and pretty general factors. It’s not about a single set of bad decisions or a single group of evil or misguided people It’s not Republicans or Democrats or farmers or bankers or old people or young people or stupid people or Christians or Muslims.

There are no boogeymen. There is (or was) a flawed system or set of system premised on false belief. Cowen explains some ways this happened and some ways we might react. The details of his ideas are too fine to continue discussing here.

Overall, The Great Stagnation does an impressive job of thinking at the margin, which very few people do, and in this respects may expand what we know and how we should think about the direction of the world. Still, it is hard for me to see it changing the overall shape of the debate in the U.S. There may not be an efficient way for individuals or small groups to change the debate, much as it is hard for a random person on their own to affect global climate change.

I still wonder how a particular individual should respond to The Great Stagnation, beyond working to raise the relative status of scientists and perhaps lowering the status of athletes and celebrities, approving of school reform efforts, and recognizing that high rates of growth may not return in the immediate future. If you’re trying to maximize income, you may want to think about learning more math and programming, since many jobs in growth fields now require them (I majored in English and am in English grad school but think I’ve picked up enough technical acumen to be slightly more dangerous than others in my field). You should also know that The Great Stagnation is non-technical and easy to read. Density of ideas in this case does not lead to impenetrable or overwrought prose.

A personal note: I’m pretty sure this is the first time I have reviewed a “book” that exists only in electronic form as I would another book. This may be a harbinger of things to come. In addition, based on how many other people are writing about The Great Stagnation, I suspect the eBook has spread to the chattering classes.

Institutional hypocrisy enabled by wealth, part 2, gambling edition

July 28, 2010 By in Culture, Links Tags: , , , , , , , , , 1 Comment

My comment from July 18 regarding Daniel Okrent’s Last Call: The Rise and Fall of Prohibition:

[…] hypocrisy regarding victimless crimes is a luxury good. It can be indulged when a society has sufficient wealth that it can afford to be hypocritical, signaling that its members want to be perceived as virtuous even when many of them as individuals would prefer to indulge in alcohol, other drugs, or sex-for-money.

Today’s New York Times:

With pressure mounting on the federal government to find new revenues, Congress is considering legalizing, and taxing, an activity it banned just four years ago: Internet gambling.

Lesson: moralizing is a vice enabled by excess wealth. Now that our societal wealth is not quite so vast, maybe we’ll consider lowering the prison population; as the Economist wrote, America locks up too many people, some for acts that should not even be criminal.

Releasing some of them would be morally justified, as the Economist makes clear, and probably economically rational. This assumes such people are not Zero marginal product workers, as Tyler Cowen discusses at the link. Such an assumption might be too large to be sustained; I can’t evaluate the arguments about zero marginal product workers very well.

Influential books (on me, that is)

March 22, 2010 By in Books, Culture, Links Tags: , , , 8 Comments

Econ (and generally interesting) blogger Tyler Cowen lists the 10 books that have most influenced him and invites other bloggers to do the same. Here’s mine, in the order I thought them up rather than importance:

1. Tolkien’s Lord of the Rings: I think many people find that their first “adult” books is a powerful influence, and I first read Lord of the Rings in late elementary or early middle school and reread it periodically: its commentary on power dynamics, the limits of knowledge, and the challenge of understanding still affect me. And it makes its way into a surprising amount of otherwise unrelated academic work. And the story. And, and, and…

2. Robert Jordan’s The Wheel of Time and the DragonLance series: Another early influence, this time mostly for the worst: the view of sexuality in both series is juvenile, the writing atrocious, and the mindless glorification of battle and power for its own sake is, from my current vantage, almost sickening. But they now show me what not to do as a writer and thinker and probably contributed to the lost, unhappy middle school years so many have.

3. Geoffrey Miller, The Mating Mind: Robin Hanson recommended this. Its ideas about the role of art and culture in sexuality and why the second half of Darwin’s theory—sexual, as opposed to natural, selection—clarified a lot of my thinking. Even today, many people focus on “natural” selection but miss the importance of sexual selection. I still don’t think I’ve exhausted the book, although I have read others in the genre. Along with some of the books below, it pointed me toward a better understanding of how people signal and how people perceive, which I didn’t understand previously.

4. Dan Ariely, Predictably Irrational: I’d read many critiques of our rationality, but before Predictably Irrational I probably would’ve argued that we should look solely at behavior to discern individual wants and that individuals are independent in an almost Ayn Rand way. Although Predictably Irrational isn’t solely responsible for this shift and others, it probably catalyzed them.

5. Conrad’s Heart of Darkness: By most of the conventional tropes of creative writing classes, Heart of Darkness is terrible. But it reminded me of the power of the unknowable and of the limitations of what we know. The most famous scene is of course Kurtz’s “The horror! The horror!”, but what strikes me in rereadiang it is how little time Kurtz actually gets and how great Marlowe’s anticipation of Kurtz is. The novel is more about how Marlowe perceives (and thinks he will perceive) Kurtz than about Kurtz himself, which taught me the power of how perception shapes reality.

6. Paul Graham’s essays: Although not technically a book, some of Graham’s essays have been collected into Hackers and Painters. I pay special attention to the essays about social structure and the role of the individual in social structures. Some of the ones about school, especially high school, I assign to students.

7. Umberto Eco’s The Name of the Rose: This is the kind of novel that I wish someone had demanded that I read earlier than I did. Claiming that something is the “greatest novel” strikes me as silly, but if I were forced to choose one, this would be in the running and seems like it contains the world as few novels do. Is this vague? That’s because trying to encompass it is beyond me.

8. Robert Penn Warren’s All the King’s Men: This book made me more cynical and hopeful about politics—at the same time. Its style isn’t baroque but tends toward long, beautiful sentences; Jack Burden’s understanding of what actually matters, which doesn’t really occur until the last chapter, is so authentic and wonderful that it seems truer to life than the darker ending of Gatsby. Still, its depiction of sexuality now feels very much of its time, rather than of all time.

9. James Wood, How Fiction Works: Wood asks a critic’s questions and gives a writer’s answers with such precision and beauty that this essentially defines the terms of the novel for me. The last two words of the preceding sentence are essential: the joy of the novel is the inability to define or encompass it.

10. Neil Strauss, The Game: I didn’t love The Game for its stories about pickups, but it has a central, important idea: most conversations in most situations are boring and predictable. Solution: shake things up. Predictability can be boring; in social situations around an attractive person, many people (not just men) get scared, and when they’re scared they become more conversationally conservative, and then fail through excess caution. Chances are, no one wants to tell you where they’re from; ask them for an opinion that elicits interpersonal beliefs instead. Most guys are also poorly educated and socialized around dating, women, and sex. The Game may not be a perfect book but it moves the conversation about dating and sexuality forward in a way that few other books have accomplished. Most of the negative discourse around the The Game doesn’t address the elisions The Game is addressing. If you have a prosocial equivalent of The Game I’d be happy to hear about it.

I’ll stress that I’m not most proud of these books: The Wheel of Time is terrible, some seem like lightweight popularization, others are not books I would necessarily recommend today, or to everyone—but they all did their work. If I could pick an 11th I’d choose Daniel Gilbert’s Stumbling on Happiness, which has several core insights that I try (and often) to fail to apply: money above something like the median household income won’t make us happy; our sex and social lives matter more; and our ability to predict what will make us happy is weak. Robertson Davies continues to be a favorite author because he has perspective in a complicated way I can’t easily define, but he combines much of the best of Victorian fiction with a modern sensibility and style that’s his and yet universal. In the His Dark Materials trilogy Philip Pullman shows how fantasy can be done not just right, but spectacularly well.

Another omission: I wish I could think of an individual book that convinced me dense cities are vital because of their networking effects, environmental improvements, the possibility (seldom achieved) of affordability, and the well-intentioned but wrong preservationist/anti-growth types. I’ve had several arguments with people who are a) pro-affordability, b) anti-sprawl and c) anti-height. You can’t consistently have all those things; a) is most often neglected. Newspaper articles in particular like to pretend these trade-offs don’t exist.

Many others have answered the call for books too, and I find their posts fascinating even though I don’t read most of the bloggers involved. But the books themselves (and the rationale for their influence) point to deeper ideas about how influence works and the serendipity of the right person finding the right book at the right time. Most of the answers are political science- and/or economics-oriented, but a fair amount of fiction crops up.

At some point I’ll also post a list of books that I wish someone had shoved into my hands when I was younger with a demand that I read said books.

EDIT: Julian Sanchez has an interesting meta post about influence, in which he posits that people mean influence in two major ways: on a formal/substantive axis (does it show me how to do something?) and on a theoretical/practical axis (does it show me what I should think/believe?). The distinction seems useful. Most of my list is heavier towards the theoretical/practical level. One thing that I’ve noticed about meta lists is that they very seldom have examples of what not to do—in other words, books that one reacts strongly against.

Tyler Cowen's political (and general) wisdom

December 1, 2009 By in Links, Philosophy Tags: , , , , , , , , Leave a comment

“[…] we are accustomed to judging the truth of a claim by the moral status of the group making the claim.”

That’s Tyler Cowen speaking of “Climategate” in his post “The limits of good vs. evil thinking.” Normally I would put something like this in a links post, but “The limits of good vs. evil thinking” is so good that I’m emphasizing it with an independent post.

The major problem is that sometimes people we perceive as morally palatable can make untruthful or not optimally useful claims, while the opposite—people we perceive as morally unpalatable can make truthful or optimally useful claims—can also occur. Notice that I’m intentionally not providing examples of either phenomenon. As Paul Graham says in the notes to “What You Can’t Say:”

The most extreme of the things you can’t say would be very shocking to most readers. If you doubt that, imagine what people in 1830 would think of our default educated east coast beliefs about, say, premarital sex, homosexuality, or the literal truth of the Bible. We would seem depraved to them. So we should expect that someone who similarly violated our taboos would seem depraved to us.

If I said this kind of thing, it would be like someone doing a cannonball into a swimming pool. Immediately, the essay would be about that, and not about the more general and ultimately more important point.

The more important point is about avoiding ad hominem attacks and being able to consider claims independently of the person making the claims in some circumstances. As Cowen says, this is really hard.

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.