Category: Books

Book Forum continues, Megan McArdle on CEO pay

by  Tyler Cowen in

For commentary on chapter four from Tim Harford’s The Logic of Life, Megan McArdle steps up.  The post is over at her blog, go over there to leave your opinions and show the Atlantic Monthly who’s got the better commentators!

Addendum: In the comments it is written: "I think the we should distinguish ourselves from them by ending the comments with ‘MR’."

Predictably Irrational, by Dan Ariely

by  Tyler Cowen in

When we set the price of a Lindt truffle at 15 cents and a Kiss at one cent, we were not surprised to find that our customers acted with a good deal of rationality: they compared the price and quality of the Kiss with the price and quality of the the truffle, and then made their choice: About 73 percent of them chose the truffle and 27 percent chose a Kiss.

Now we decided to see how FREE! might change the situation.  So we offered the Lindt truffle for 14 cents and the Kisses free…

But what a difference FREE! made.  The humble Hershey’s Kiss became a big favorite.  Some 69 percent of our customers (up from 27 percent before) chose the FREE! Kiss, giving up the opportunity to get the LIndt truffle for a very good price. 

That is from Dan Ariely’s new and excellent Predictably Irrational: The Hidden Forces that Shape Our Decisions.  Here is Dan’s book-related blog.  All of a sudden my head is spinning, wondering what a relative price ratio really means (we can’t divide by zero).  Or is this just the Alchian and Allen theorem on steroids, namely the claim that fixed charges encourage the consumption of the higher quality good?  Or I think: "Zero, is there something special about that number?"

There is more on the way in behavioral economics.  There is Sway: The Irresistible Pull of Irrational Behavior, by Ori and Rom Brafman and Nudge: Improving Decisions About Health, Wealth and Happiness, the defense of voluntary paternalism from Richard Thaler and Cass Sunstein, due out later this June and April respectively.

Six Degrees

by  Tyler Cowen in

I learned from this new book.  Most of all it shows how the earth likely will change as temperatures rise.

For instance Lima and the Andean parts of Ecuador and Boliva are heavily dependent on Andean glacial melting for their water.  An earth warmer by two degrees would create very serious problems for them, once the glaciers disappear.  Most of all I came away with a renewed sense of the importance of water issues and the need for greater investment in desalination technologies (yes I know it’s not easy and transporting the desalinized water is often a greater problem than getting the salt out.)  Stopping the destruction of tropical forests is another partial remedy for warming and it seems more doable than shutting down all or most carbon emissions.

That said, parts of the book struck me as very weak.  The discussions of biodiversity destruction did not convince me that the scope of pending losses is unacceptable.  There’s a lot of handwaving and listing of lost species as if that ends the argument.  We’re in a mass extinction anyway and I’d like a serious analysis of the marginal impact on global warming on this process.  "It’s so bad anyway that further species loss must be unacceptable" doesn’t cut it for me.

It is also claimed (p.236) that an earth five degrees warmer would result in the culling of "billions."  Of humans that is.  There is little talk of substitution or technological adaptation.  Nor do I buy the claim that carbon rationing would bring "a dramatic improvement in our quality of life" by getting us off the streets, out of the planes, and bringing us closer to the rest of the community. 

Overall I found this the best, most accessible, and most vivid book for visualizing the actual problems from global warming.  But the Cassandras of global warming need to be more responsible, and more wary of overstatement, if they wish to press home their very important arguments.

Jonathan Adler has a good recent round-up post on some global warming issues.

Chapter 3 of Logic of Life: Many Could Have Been Mrs. Rojas, but There is Only One Mrs. Rojas

by  Fabio Rojas in

This review is cross posted at the orgtheory.net, the management and social science blog.

In chapter three, "Divorce is Underrated," Tim Harford explores the economics of love, marriage, and divorce. It’s the kind of topic that makes people hate economists. Of all the subjects studied by economists, can’t love be spared the rational choice treatment? Of course not! If you spend a few moments thinking about how men and women scheme in the dating world, you’ll quickly see that a rational choice theory of relationships isn’t such a crazy idea after all.

Harford hits the major points you’d expect. People make substitutions, and they respond to supply and demand in dating and sex. One interesting section talks about the “optimal” divorce rate and how in the post-1970s era, we’re probably switching from a situation of many marriages with many divorces, to less frequent marriages and less frequent divorce. Harford quotes MR regular Justin Wolfers in saying that there is social learning and that we should appreciate that the optimal divorce rate is not zero, lest we believe in perfect marriages.

The average person probably hates this econo-talk because it seems to devalue love. Here’s where it helps to be a sociologist. Yes, from the bird’s eye view, there is a “love market” and you are just a love widget. But let’s take the symbolic interactionist perspective. Relationships are highly customizable. Once you bond with a person, you can make the relationship highly unique and hard to substitute. Even if two people are similar, they can form very different relationships with different histories. If you’ve done that, then you’ve created a fairly unique thing that’s hard to replace. By yourself you might be generic, but in a relationship you can be very special.

Translating back into econo-talk, people in loving relationships differentiate their “love product.” A person in a couple with a special history knows that there will never be another person who has lived the same life with them. That knowledge makes them stick it out. If you can do that in a way that improves both parties, then you won’t contribute to the optimal divorce rate.

Code Red

by  Tyler Cowen in

The book is by David Dranove and the subtitle is An Economist Explains How to Revive the Healthcare System Without Destroying It.  Here is the Amazon listing.  Here is the book’s home page.

Code Red is one of the two or three best books on the economics of health care.  It is especially strong on how the current mess evolved historically and what has been tried (or not tried) along the way.  This is the place to go to understands PSROs or what happened to the HMO revolution.  Dranove is very pro-Medicare but he (reluctantly) rejects single-payer systems for limiting innovation.  Instead he finesses the market-government divide by calling for federalistic competition:

Congress should mandate that all states reach targets for the number of uninsured, say, below 5 percent within 5 years.  Congress could tie compliance to a set of financial carrots and sticks, and it does with Medicaid.  To prevent a race to the bottom, Congress should also specify a minimum benefit package.  It would then be up to each state to devise the most effective way of meeting these coverage goals.

I fear that minimum benefit packages will prevent insurance from ever being cheap plus I wonder if Medicaid shouldn’t be done on the national level.  This book won’t make anyone fully happy, but it is a must for fans of health care policy.

Logic of Life – Chapter 2: Game Theory isn’t Always about the Games We Play

by  Fabio Rojas in

This review is cross posted on orgtheory.net, the management & social science blog.


    It’s a pleasure to be back at the Marginal Revolution. Let me start out by agreeing with Tyler and Bryan. Tim Harford is one of the leading popular social science writers and we’re lucky to have him.


    Today, I’ll focus on Chapter Two of Tim’s book, "Las Vegas: The Edge of Reason." In this chapter, Harford describes game theory. In a nutshell, game theory studies any situation where (a) you have multiple people striving to achieve a goal and (b) your actions depend on the actions of the other people in the game. By most accounts, game theory is one of the great accomplishments of modern social science. Once you realize that people’s actions are both utility maximizing and interdependent, then game theory can help you model just about any form of cooperation or conflict.


    Harford discusses the basic concepts of game theory with vivid examples ranging from poker, to nuclear war, to quitting smoking. And, as expected, game theory usually provides a great deal of insight. Harford shows how game theory can also be enormously useful, even life saving. Harford recounts how economist Thomas Schelling realized that some situations might encourage participants to jump the gun and initiate devastating conflict. What Schelling realized is that these dangerous games had low information, such as the US misunderstanding a Soviet action, and starting nuclear war. Schelling advocated increased communication between the US and Soviet leadership, including the creation of the hotline between Moscow and the US, which helped defuse tensions in later Cold War disputes.


    I’ll finish this post with my one big criticism of game theory, at least the basic version described by Harford and taught in intro courses. In game theory 101, you assume that people develop optimal strategies in response to other rational actors. One huge problem with a lot of these models is that the games are very complicated. It’s hard to imagine most people perform the mental acrobatics of game theory actors.


    One response is that game theory is empirically well supported, which suggests that some process drives people to the strategies described by game theory. For example, Harford describes how economists and mathematicians used game theory to sort through the insanely complex game of poker and that the optimal game theory strategy was actually fairly similar to what world class poker players do.


    So game theory is supported, right? Not so fast. Game theory has two parts (a) a description of optimal strategies, and (b) a prediction that people will actually solve the game and find these strategies. In my view, game theory 101 is well supported, in poker at least, on point (a), but not (b). In other words, world class poker players rarely sit around and do backwards induction, or any other flavor of equilibrium analysis, but they still obtain strong strategies through trial and error.


    What I suspect is that world class poker emerged from an evolutionary process. Very smart people can figure out certain strategies, but nobody can figure out the whole game by themselves, lest they become full time mathematicians. The typical world class poker player probably inherits a bunch of rules that were tested by earlier generations, and adds a few new twists. Competition weeds out bad rules. Even Steve Levitt, star economist, Harvard & MIT grad, developed his own idiosyncratic strategy, rather than solve the game himself.*


    In the end, game theory is really a first step in understanding complex interactions. The next step is developing an evolutionary theory of games where actors inherit a tool box of strategies from previous generations of players. Already, there is a fairly well developed genre of game theory taking this approach, but I welcome the day when it becomes refined enough so that it can account not just the strategies of leading poker players, but how these strategies emerged from generations of competition.


*According to the news reports, he developed his own "weird style" rather than completely solve the poker game. But it works for him! What would Johnny von Neumann say?

What I’ve been reading

by  Tyler Cowen in

1. Forgotten Continent: The Battle for Latin America’s Soul, by Michael Reid.  A good treatment of the region’s recent history; it is best for its balanced assessment of what market-oriented reforms have managed or not.

2. Where Have All the Soldiers Gone?: The Transformation of Modern Europe, by James J. Sheehan.  Blah, blah, blah, blah, Europe has fewer soldiers than it used to, blah.  Blah.  Sheehan is a first-rate historian, but there’s not much to this book.

3. Architecture of Authority, by Richard Ross.  This book is nothing more than photos of jail cells, parole hearing rooms, Mary Boone Gallery, and the like.  Thought-provoking.

4. Due Considerations: Essays and Criticism, by John Updike.  Scattered essays on just about everything.  Completely apart from his fiction, Updike is simply one of the smartest and most impressive people out there.  It is amazing how many topics he knows so much about and how well he writes about them.

5. Free Lunch: How the Wealthiest Americans Enrich Themselves at Government Expense (And Stick You With the Bill), by David Cay Johnston.  This is quite a good compendium of different ways that government screws us over, written from a mixed populist/libertarian point of view.  Recommended.  I expected not so much but the substance here held my attention.  I’d now like to know the total welfare cost of all these bad policies.

Book forum

by  Tyler Cowen in

Our next installment on Tim Harford’s The Logic of Life will pop up Sunday night or Monday morning.  Guest blogger Fabio Rojas will be (re)joining us to discuss chapter two, which covers among other things the game of poker.  Save up your book comments for then!

Liberal Fascism

by  Tyler Cowen in

Here is Henry Farrell on the book.  Here is Matt Yglesias.  Here is Fred Siegel.  Here is Arnold Kling.  Here is another review.  Here is Megan McArdle on the BloggingHeads version.  Here is the Amazon link.  I am closest to the CrookedTimber commentator who wrote:

Jonah’s book, at its heart, is geared toward popularizing the arguments of smart intellectuals/academics, from John Patrick Diggins to A.J. Gregor to Hayek to Erik Von Kuehnelt-Leddihn.

Or try this excellent book, or for that matter John T. Flynn’s As We Go Marching.  I divide the arguments of Liberal Fascism into three categories:

1. The oft neglected but obviously true: For instance Mussolini really was a precursor of the New Deal and he was initially regarded with fondness by many on the American left.  This sort of claim is the core of the book and it does stand up after you take all the criticisms into account.  I am pleased to see it upend traditional "feel good" narratives of politics.

That said, a "who cares?" response might be in order from a social democrat.  Good people can have bad ideas, so can’t bad people — namely the fascists — have had some good ideas?  After all, George Lucas borrowed from Leni Riefenstahl.

2. The false claims: Contrary to what Goldberg argues, it simply isn’t true that Hitler and Nazism were essentially left-wing phenomena.  Not all right-wing ideas are Burkean, and the mere fact that the Nazis were "revolutionary" does not make them left-wing.  Furthermore the Nazis busted labor unions and used right-wing emotive tricks for their racism and authoritarianism.  When all those old Nazis popped up in South America, where did they all find themselves on the political spectrum?  Overall fascism has much stronger roots in the Right than Goldberg is willing to emphasize.

I also would have put more weight on the aestheticization of politics than did Goldberg.  That would help us see why supporters of the War on Drugs, while they favor very violent and possibly unjust means, should not be regarded as fascists.

3. The true but possibly misleading claims.  Goldberg writes for instance that Hillary Clinton is not a fascist.  OK, but simply to write that she isn’t a fascist is reframing the terms of the debate, and not in a way I am fully comfortable with.  I’m sure it bothers many Clinton supporters more than it bothers me.

Goldberg insists he only wants to stop the slander of the Right and its long-standing identification with fascism.  I am fully behind this goal of tolerance, and I might add I recall fellow Harvard econ grad students calling Martin Feldstein (and perhaps me!) a fascist on a regular basis.  That simply shouldn’t happen.  The problem is that Goldberg’s book will be interpreted by its buyers and readers as a call to do the same to the left.  Take a look at the cover and the title, both of which Goldberg distanced himself from on Comedy Central (I can no longer find the YouTube link).  But they’re on the book nonetheless.

Is Goldberg "to blame" for how his book will be interpreted, especially if he requests an interpretation to the contrary?  That’s a moot point.  But it gets to the core of why I don’t like the book more than I do. 

The bottom line: As Arnold Kling recommends, all parties involved should read Dan Klein’s "The People’s Romance," and start the debate there.

Addendum: Some of the critical web reviews admit they have not read the book, but they rely heavily on Goldberg’s (apparently controversial) web writings.  I’ve never read Goldberg before, so I am coming at this book "fresh."

Michael Shermer’s Mind of the Market

by  Tyler Cowen in

This book is the latest attempt to justify freedom and the market economy by reference to the knowledge of science and biology.  Here is my review, in Washington Post Book World.  Excerpt:

I’m sympathetic to Shermer’s conclusions, but I fear his standard of evaluation is too blunt an instrument. If the options are capitalism and the Khmer Rouge, no doubt capitalism wins hands down. But to what extent should we restrain capitalism to fund a social safety net? Should our government place heavy taxes on beer and potato chips to fund the National Science Foundation at higher levels? Most broadly, to what extent is it morally permissible to interfere with freedom, or can we even use freedom as a concept in a world where we do social science by hooking people up to brain scanners?

Shermer is famous for founding the Skeptics Society and editing the magazine Skeptic, which debunks claims of the supernatural. His monthly column for Scientific American is a regular plea that reason should govern human affairs. But his book raises very real questions about just how far skepticism should extend. Should we also be skeptical about using moral judgments of right and wrong to address the tough questions of politics? For instance, can we make normative judgments about who deserves to pay how much of the tax burden to finance the U.S. government, or as to whether somebody’s job should be protected from foreign trade?
Shermer either needs to dismiss moral philosophy as an illusion and a mere byproduct of human evolution, and thus display skepticism, or he needs to grant it credence and take his own moral stance. Descriptive science doesn’t tell us whether it is fair to allow kidneys to be bought and sold, even if it helps explain why some people find the practice repugnant. Judgments of right and wrong cannot be avoided, and thus we tread away from the realm of familiar natural science.
There are really two books within "The Mind of the Market." The science book is finished and polished, yet it does not present fundamentally new results. The book on capitalism discusses important questions, yet it is unfinished and unpolished. Shermer does promise us an entire new book to fill in the missing pieces here. He already has earned the right to our attention; the next question is whether he will give his philosophic and romantic side the greater rein that it deserves and requires. This East African plains ape is optimistic.

The Lively and Logical Logic of Life

by  Bryan Caplan in

Boredom drives a lot of academic research.  After you’ve studied a subject for decades, it isn’t much fun to keep repeating the standard lessons, so you mischievously start looking for counter-examples and loopholes.  Unfortunately, when the mischievous academic talks to a broader audience, he often leaves the impression that the standard lessons are a waste of time.  Frankly, I think that a lot of recent popular economics books fall into this trap.

Tim Harford’s The Logic of Life is a welcome antidote.  Harford argues that the standard economic assumption of human rationality usually works.  In fact, it works in a lot of cases where you might think it doesn’t.

The best example in chapter 1 is condom use by Mexican prostitutes.  It’s easy to say "A prostitute would have to be a brain donor not to use a condom every time."  But Tim demurs.  By bargaining about condom use, instead of using every time, prostitutes raise their income by about 25%.  Still not worth it?  Think again:

In fact, the prostitutes know that while the risks are real, they are modest.  Only one in eight hundred Mexicans carries HIV, and even among prostitutes it afflicts just one in three hundred.  Even if a prostitute is unlucky enough that one of her unprotected jobs is with a man who is HIV positive, the risk that she will catch it is less than 2 percent if one of them is carrying some other sexual infection, and less than 1 percent otherwise…

As far as we can tell, the typical Morelian prostitute is acting as though she valued one extra year of healthy life at between fifteen thousand and fifty thousand dollars or up to five years’ income.

Tim may sound like a typical insensitive economist in this quote, but he’s firmly in the Alan Blinder "hard heads, soft hearts" tradition:

[A] rational world is not necessarily a wonderful one… Rational individuals can make choices that are bad news for others; risky sex is just a particularly clear example.  And when rational individuals face a miserable set of choices, as do the Morelian prostitutes, they cannot do better than pick the best of a bad lot.  We will not solve social problems if we pretend that they are caused only – or even mostly – by the mad, the stupid, and the morally degenerate.

As an academic, I’m tempted to immediately highlight a counter-example.  Morelian prostitutes value a year of healthy life at up to five times their annual income.  But what about Levitt and Dubner’s drug dealers who risk their necks for minimum wage?  Aren’t they irrational?

But for now, I’m going to resist the temptation to dwell on counter-examples.  You’ve got to learn to walk before you can learn to run.  And you’ve got to understand rational explanations for human behavior before you can understand irrational explanations.  The Logic of Life may well be the best introduction to the rational choice approach on the market.  Even better, it’s well-written enough to inspire even jaded academics to get back to basics.   Bravo, Tim.