Sunday, January 27, 2008
Criminals, rats and teens - all surprisingly rational
Posted by David Smith at 08:59 AM
Category: David Smith's other articles

harford.jpg

An interview with Tim Harford about his new book, The Logic of Life, which you can buy here.

Tim Harford, despite his jacket, jeans and baseball boots, still looks like the Oxford economics tutor he used to be. But now he has become a bestselling author, and he has done it by applying the economics he used to teach his students to real life.

The Undercover Economist, his first book, sold 600,000 copies worldwide, 160,000 of them in Britain. Books based on economics are not supposed to sell that well, let alone be prominently displayed on the bestseller racks by WH Smith. Were it not for Freakonomics, by the American economists Stephen Dubner and Steven Levitt, which has sold an extraordinary 3m copies, Harford’s achievement would be even more outstanding.

His second book, The Logic of Life, is published next week by Little, Brown. Harford is one of life’s nice guys, so it is a bit of a shock to open the new book and go straight into oral sex, apparently the rational choice of American teenagers worried about Aids or abortion. But like its predecessor it is never short of interest.

Harford cites research showing that laboratory rats make a rational choice between quinine water, which they don’t like, and root beer, which they do. If the quinine water is cheaper than the root beer – they are allowed more of it for every press of the lever in the cage (and they are permitted only a limited number of presses) – they drink more of it to quench their thirst. The rats, in fact, also prove one of the most elusive theories in economics, the idea of the Giffen good, named after the British statistician and economist Robert Giffen.

He said there were certain goods that broke the normal rules of economics – when their price went up, people consumed more of them. For years, the only known example came from the Irish potato famine. As potato prices rose, the Irish chose to consume more of them, and less of the more expensive meat, because they needed to maintain their food intake. In the end, of course, there were not enough potatoes. In the laboratory example, the price of quinine water was gradually raised but remained below that of root beer. True to Giffen’s hypothesis, the rats consumed more of the water despite the price rise, and less of the beer.

People will debate whether all of Harford’s many examples of humans being driven by rational choice work as well as that. I was undecided whether Chris “Jesus” Ferguson, a weedy academic, became world poker champion in Las Vegas because he followed the rules of game theory, a branch of rational choice, or because he simply learnt from experience how to become a good poker player. But the story is almost too good not to be true.

Above all, the idea that we are mainly driven by rational choice, whether we are aware of it or not, is an alluring one. Harford makes clear he is not talking about the rational economic man of the textbooks, the cold calculating machine driven only by financial incentives. Rational choices can be noneconomic in nature, as with the sexual habits of American teenagers.

As he puts it: “I hope to convince you that people are rational nearly enough and often enough to make the assumption of rational choice a useful one.” Mostly, he does.

His examples work because they are realistic and because academic researchers have begun to delve into areas that are interesting and fun. They have proved, for example, that men and women in speed-dating sessions raise or lower their sights according to the quality of the field, so the number of actual dates that result remains constant. Anybody who has been to a college disco knows the phenomenon. There are plenty more such fun examples.

That does not mean Harford’s task has been an easy one. Academic papers can be extremely opaque and difficult to decipher. He usually gets around that by ringing up the authors, most of whom are happy to explain their research in more straightforward terms.

He wrote his first book after leaving Oxford for Shell, the oil giant, where he met his wife. Harford negotiated a couple of mornings off a week to write, putting all the economics he knew into a book for the general reader.

Nobody wanted to publish it at first, but it was taken up by the American arm of Oxford University Press in November 2005, a few months after Freakonomics hit the shelves. Publishers had begun to realise popular economics could sell. Six months later it was published in Britain.

The Logic of Life is in many ways a better book. There is a common thread – rational choice – running through it. It is what film-makers would recognise as a bigger-budget production; or at least Harford was able to use the success of his first book to gain access to people who might not have given him houseroom before.

Thus he sees at first hand the Nobel prize-winning economist Gary Becker putting his own rational-choice theories into practice. Harford turned up by appointment at Becker’s Chicago home and the professor, now in his seventies, drove them to a restaurant, where he proceeded to park in a bay with a 30-minute time limit.

The bays were not checked too often, he told Harford, so it was worth taking the risk of getting a fine against the convenience of parking. He did it all the time – sometimes he got fined, but most times he did not. He was making a rational choice on the basis of the potential cost of getting caught and the benefits of easy parking.

This was exactly what Becker says all criminals do, in the work for which he won his Nobel prize. The tougher the penalty, the greater the cost of getting caught, and the rational choice may be not to risk it.

The case has since been proved by Levitt, of Freakonomics fame, who examined juvenile crime rates by age in different US states against the age at which offenders become subject to the adult courts and thus harsher penalties. Juvenile crime rates continued to rise until the age at which offenders became exposed to adult levels of punishment.

And, sure enough, there was no ticket on Becker’s car when they emerged from the restaurant well over 30 minutes later.

Harford has at least two more books in the pipeline, one of which has the working title of An Idiot’s Guide to Saving the World. In the meantime he continues to write the “Dear Economist” problem page for the Financial Times while travelling the world in search of more of the research-based insights that fascinate him – a lifestyle that is, you might say, an entirely rational choice.

From The Sunday Times, January 27 2008

Comments

Looks a good read.

My contribution to the economic rationality argument is to look at the literature on rates of return to qualifications short of degree or A level equivalent (NVQ level3) and muse aloud whether bunking off from school is rational. Given that the benefits of getting a vocational NVQ2 over no qualifications are marginal, I think that bunking off could be rational.

Posted by: paulbiv at January 28, 2008 01:34 PM
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