Economics of Just About Everything: The Hidden Reasons for Our Curious Choices and Surprising Successes in Life

by Andrew Leigh

Overview

A fun and illuminating book full of surprising facts and amazing insights about how the laws of economics affect our everyday lives—perfect for fans of Freakonomics
Did you know that another 10 centimeters of height boosts your income by thousands of dollars per year? Or that natural disasters attract more foreign aid if they happen on a slow news day? Drawing on examples and data, Andrew Leigh shows how economics can be used to illuminate what happens on the sporting field, in the stockmarket, and at work. Economics has things to say about AC/DC and Arthur Boyd, dating and dieting, murder and poverty. Incentives matter, often in surprising ways, and seemingly simple everyday activities can have unexpected outcomes. If you like fresh facts and provocative ideas, this is great train and weekend reading. You'll soon see the world and the people around you in a new light.

Product Details

ISBN-13:	9781743438268
Publisher:	Allen & Unwin Pty., Limited
Publication date:	04/01/2015
Sold by:	Barnes & Noble
Format:	eBook
File size:	825 KB

About the Author

Andrew Leigh holds a PhD from Harvard. He appears regularly in the media, and is author of several books.

Read an Excerpt

The Economics of Just About Everything

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By Andrew Leigh

Allen & Unwin

Copyright © 2014 Andrew Leigh
All rights reserved.
ISBN: 978-1-74343-826-8

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CHAPTER 1

For love or money

How should an economist date online, can you find true love with imperfect information, what are your odds of divorce and what is the surprising geography of same-sex couples?

Located in far north Queensland, 400 kilometres inland, the town of Mount Isa sits atop vast deposits of lead, silver, copper and zinc. Mining is a male-dominated industry, so the town has had more men than women for about as long as anyone can recall. In 2008, then mayor John Moloney decided to take action to rectify the gender imbalance, announcing: 'if there are five blokes to every girl, we should find out where there are beauty-disadvantaged women and ask them to proceed to Mount Isa'.

Asked by a journalist whether he thought such women would have a better chance of finding a partner in Mount Isa, Moloney replied, 'I would think so. It would naturally seem that there may well be less competition.' Local Anna Warrick, a 27-year-old single occupational therapist quickly hit back, responding, 'We've got a saying up here that the odds are good, but the goods are odd.'

What is striking about the Mount Isa example is that the town's gender ratio was only mildly skewed (in the 2011 Census, the town had 11,325 men and 9,912 women, nowhere near the mayor's five to one ratio). And yet even a small tilt had both the mayor and Mount Isa's single women feeling that the odds had shifted. One of the core ideas in economics is 'market equilibrium'. If we regard dating as a market, then a monogamous equilibrium requires a similar number of men and women. Mount Isa was in a different equilibrium — one in which more men than women were single. Put another way, there was 'male unemployment' in the Mount Isa dating market.

In the case of Mount Isa, it took a gender imbalance to get people thinking like economists about the dating market. By the end of this chapter, I hope you'll recognise that 'the economics of everything' even has something to say about matchmaking.

The economic perspective on marriage is perhaps best summed up by Tim Minchin's song 'If I Didn't Have You'. The song begins:

If I didn't have you to hold me tight
I didn't have you to lie with at night
If I didn't have you to share my sighs
And to kiss me and dry my tears when I cry
Well I really think that I would
... Have somebody else

© Tim Minchin 'If I didn't have you'

After surveying the other possible people he might have gone on to love, Minchin decides:

It's just mathematically unlikely that at a university in Perth I happened to stumble on the one girl on Earth specifically designed for me

© Tim Minchin 'If I didn't have you'

The bewildering array of possible romantic options confronting young people brings to mind The Whitlams, who noted that if the object of their desire was one in a million, then 'there's five more, just in New South Wales'.

So what's a desperate and dateless economist to do? The economics of dating comes down to three simple rules:

1. There is no perfect match, but some matches are definitely better than others.

2. You won't know how well suited you are to someone until you get to know them.

3. Time is scarce, so a decision based on limited information is probably better than no decision at all.

The challenge in dating is that you don't have enough information, and you don't have enough time to get it. To give you an idea of just how severe the problem is, let's imagine that you're aged 18 to 25, and you're trying to find the person you're best suited to in that age range. To begin, there are about 1.5 million men and 1.5 million women to choose from. If you picked a sex, and spent only three minutes with each of those people, then it would take 25 years of speed dating to find the person you liked the most. Things are harder still if you want more than three minutes to assess each person, if you're bisexual, if you want someone older or if you think true love resides overseas.

Fortunately, economic theories are rarely deterred by problems involving large numbers. Better yet, economists are familiar with precisely this kind of problem. It's called an 'optimal-stopping problem'.

The idea of an optimal-stopping problem is simple: you must choose a time to stop in order to get the best outcome. You can choose when to stop. Information is produced by a random process, and each day you get some new information. If you never stop, you get an outcome that isn't particularly attractive, so, at some point, you probably want to stop.

In 1875, Cambridge University mathematician Arthur Cayley came up with the first optimal-stopping problem, which looked at gambling games. Since then, the approach has been applied to a raft of other life questions. If you're trying to sell your house, at what point should you accept an offer that's lower than your asking price? If you're looking for a job, which job should you settle for? If your car is having mechanical problems, when should you trade it in? If you're fishing, when should you call it a day?

But the most interesting application of optimal-stopping problems is romance. Like most other optimal-stopping problems, no one is forcing you to stop searching for the right person to love. Similarly, you could never sell your house, always stay unemployed, keep your car until it stops in the middle of the freeway or do nothing but keep fishing. For most people, a life of dating is in the same category.

How should you carry out your search? One insight is that just as when buying a house, you should gather as much information as possible. My unscientific poll of economists suggests that most like the idea of speed dating and online dating, since these search techniques offer the potential to garner more information about potential matches.

Because online dating generates large data sets, and economists enjoy analysing large data sets, the two are a natural fit. In general, the research throws up few surprises: men and women have a preference for people who are of similar age, income and education, and of the same race. Among heterosexual couples, women have a stronger preference for high income, while men have a stronger preference for good looks.

Things get more interesting when economists study the behaviour of people who use online dating. About four-fifths of the time, it is men who make the initial contact. Of 100 emails sent by men to women, fewer than four end up in a first date. While some couples agree to meet after just a few emails, it takes on average six emails to get to a first date. Online daters are surprisingly choosy.

Online dating is already changing relationships, with one study finding that a fifth of those who use dating site RSVP ended up getting married as a result. The internet is also making it possible for people to get together who might never have met otherwise. On a flight to the United States a few years ago, I sat next to a Brisbane woman who had worked as a retail assistant. She had met her boyfriend, a helicopter pilot from Houston, on eHarmony. He had earlier flown out to spend a week with her in Australia, and she was now moving to Texas to live with him. A computer algorithm had brought them together.

Internet dating is particularly important for people who are looking for something different. For a young gay man in a small country town, online dating provides a way of meeting potential partners that's probably safer than the offline alternatives. The same goes for people who are looking for a partner of an unusual race, ethnicity, religion or body size. This helps explain Australian sites such as Two of a Kind (for Jewish couples), Aussie Men (for gay couples) and Mature Match Maker (for older couples).

Online dating isn't without its risks, since anyone can pretend to be someone they aren't (as a famous New Yorker cartoon put it: 'On the Internet, nobody knows you're a dog'). Anyone using online dating is advised to follow basic rules such as googling the person they are chatting with, not sending money to a person they haven't met and arranging the first meeting in a public place. But the technology does offer the potential to help join up couples who might never have found one another without the web.

Other studies have analysed speed-dating events, in which groups of men and women meet in a structured setting, and take it in turns to have short conversations. After the conversation, each person records whether they would like to exchange contact details (this is called a 'proposal'). If both say yes, the organiser provides them with each other's contact details.

One research team analysed the data from a British speed-dating company, whose events attracted an average of 22 men and 22 women. The typical male participant made five proposals, while the typical female participant made three proposals. Because women were more selective, one-third of male participants ended the night with no matches, as compared to just one-tenth of female participants. On average, taller men, slimmer women and non-smokers received more proposals. Having children did not affect the number of proposals (though it's quite possible the topic didn't arise in most three-minute conversations).

In another study, US economists set up their own speed-dating program, using students at Columbia University in New York. This allowed them to collect data on intelligence (university entrance scores) and attractiveness (based on having independent raters assess photographs of the speed daters). Not surprisingly, they found that women placed more importance on intelligence, while men placed more importance on beauty. More curiously, they observed that women had a strong preference for partners of their own race, while men did not. (Other studies have found strong racial preferences among both men and women.)

Because the US research team were running the speed-dating sessions themselves (rather than crunching data afterwards), they were able to see what happened as they increased the number of participants. When the sessions had ten men and ten women, both men and women proposed to half of those present. When the number of participants was doubled to twenty men and twenty women, men still proposed to half the women, while women became more selective, proposing to around one-third of the men. They explained the finding by quoting a New Yorker cartoon that depicts a group of men and women at opposite ends of a bar. The thought bubble above the men reads 'Select All', while the one above the women reads 'Select None'.

While online dating and speed dating can tell you a bit more about your romantic options, there's only so much you can learn from emails and a three-minute conversation. To solve the optimal-stopping problem that is modern love, you'll have to get to know your potential match a little better.

Here's where things get tricky. In some optimal-stopping problems, information comes along in an instant. For example, if you're selling a house, you know immediately whether a bid is larger or smaller than the one before it. If you're fishing, you know the size of each fish as you pull it over the edge of the boat. In other optimal-stopping problems, it's not immediately obvious whether you've found a great match. If you're job-hunting, you won't really know whether a firm is a good fit until you've worked there for a while. And if you're looking for love, then as Tim Minchin has noted, love is not 'destined perfection' but an 'affection' that 'grows over time'.

So here's the problem when you meet someone: you need to work out whether you like them and they need to work out whether they like you. Then, the longer you spend together, the stronger a bond you'll form.

Sounds tough, doesn't it? But the economics of relationships isn't too dismal. In fact, theory and empirical evidence suggests that love matches may be on the rise. It's a result that comes from my friends Betsey Stevenson and Justin Wolfers of the University of Michigan — an economics couple who collaborate on research on a variety of topics, including the economics of the family. Stevenson and Wolfers pointed out that a century ago, the norm was for fathers to be the breadwinner, and mothers to be the homemaker. Because both partners specialised, the incentive was to look for someone based on their ability to do something you couldn't do. That meant young men were looking for a great homemaker, while young women were looking for a great breadwinner.

Today, things have changed considerably. Although remnants of traditional gender roles still persist, most mothers these days do some paid work, and most fathers help out around the home. More than ever before, both parents are a combination of breadwinner and home-maker. So today's twenty-somethings are less likely than their grandparents to be looking for someone who has different skills and abilities. Instead, they're more likely to be looking for someone who can do similar things to them. More than ever before, young people have the freedom to look for a soul mate.

Indeed, the evidence seems to suggest that as incomes rise, people are more likely to be in love. Gallup survey data for 113 nations asked people whether they experienced love during the previous day. In the poorest nations, about six in ten people say yes. In the richest countries, the share rises to seven out of ten. While some respondents could have in mind non-romantic affection (e.g. to a parent or child), it's possible that the Beatles were wrong: money can buy you love.

If love works out well, you might even decide to tie the knot. Whether or not to marry is a personal question, but the economics are straightforward. Imagine a young couple, Kim and Chris. They would like to enjoy a monogamous relationship together but each knows that they might be tempted to cheat. Marriage helps raise the social cost of cheating by giving it a new name ('adultery'), and making it a breach of a promise they've made in front of their friends. From Kim's perspective, marriage may help prevent Chris from straying (if he is, in Hillary Clinton's famous words, 'a hard dog to keep on the porch'). But even if Kim is the one most likely to cheat, she may favour marriage because it helps prevent her from putting short-term temptation ahead of long-term happiness.

Forgoing short-term happiness for long-term gain is a notion grounded well before the birth of economics. In Homer's epic poem The Odyssey, Odysseus wanted to hear the Sirens, beautiful sea creatures whose enchanting song lured sailors onto the rocks. He solved it by having his sailors put beeswax in their ears, and then tie him to the mast. Whatever he said when the Sirens started singing, he told them, they were not to untie him: 'Firm to the mast with chains thyself be bound / Nor trust thy virtue to the enchanting sound'. Like Odysseus tying himself to the mast, the marriage contract can sometimes make us happier overall by helping us avoid temptation. (In the next chapter, we'll look at similar issues in the context of health economics.)

If you opt to get married, you'll probably participate in a ritual that has its roots in economics: the purchase by the groom of a valuable engagement ring for the bride. Engagement rings have their origins in an era when potential husbands placed great value on a bride being 'pure'. Once engaged, couples might — shock! horror! — spend time alone together. This meant that if a man called off the engagement, his fiancée might not be able to find such an eligible match in the future. She was therefore to keep the engagement ring as compensation. Despite major shifts in social norms about pre-marital sex, the tradition of expensive engagement rings continues to this day.

Yet no matter how expensive the ring, some marriages will end in divorce. Just as the internet helps couples find their first love, it probably acts as a technological spur to infidelity (indeed, the United States now has a website called Ashley Madison, devoted entirely to those seeking extramarital affairs). Perhaps contrary to the stereotype, women initiate divorce nearly twice as often as men.

The average divorce probability masks considerable differences across the community. Using a data set of nearly 7000 people, I crunched the statistics on divorce according to three things: how old you were when you got married, whether you finished high school, and how long you've been married. The results are shown in Table 1. In the first decade of marriage, the highest divorce rate is among those who didn't finish Year 12 and were married as teenagers. Of these couples, 23 per cent will split up in the next five years. By contrast, for those who finished Year 12 and married in their forties, the divorce rate is just 5 per cent.

A similar pattern persists among couples who have been married for more than a decade. The chance of splitting up is about twice as large for those who married as teenagers than for those who married in their thirties. In economic terms, you're less likely to find the best solution to your optimal-stopping problem if you stop (i.e., get married) when you're in your teens. Theory and data suggest that it's worth waiting until at least your twenties.

Perhaps surprisingly, whether a couple has children doesn't seem to affect their probability of getting divorced. But, as you delve more closely into the data about divorce, a curious pattern emerges. Among two-child families, those with a boy and a girl seem to have different marriage rates than those-with two boys or two girls.

(Continues...)

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Excerpted from The Economics of Just About Everything by Andrew Leigh. Copyright © 2014 Andrew Leigh. Excerpted by permission of Allen & Unwin.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.

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Table of Contents

Contents

Introduction,
1 For love or money,
2 Fit for tomorrow,
3 Starting lineup,
4 Looking for a raise,
5 Careering through life,
6 Cops and dollars,
7 Helping the world's poor,
8 Smashing the crystal ball,
9 Playing the blue guitar,
Notes,
Acknowledgements,