Dear Undercover Economist: Priceless Advice on Money, Work, Sex, Kids, and Life's Other Challenges [NOOK Book]

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Dear Undercover Economist

Priceless Advice on Money, Work, Sex, Kids, and Life's Other Challenges

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By Tim Harford

Random House Trade Paperbacks

Copyright © 2009 Tim Harford
All right reserved.
ISBN: 9780812980103

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Chapter One


Speed dating with a money-back guarantee

It is not for nothing that sex, dating, and relationships have traditionally formed the staple of the agony column. Wise words on these subjects are not easy to find. Not many people want to ask their parents for tips about losing their virginity. It is no less embarrassing to seek the opinions of colleagues as one contemplates an extramarital affair. We know that envious friends may not always give us impartial advice when we wonder whether we have, at last, found “the one.” What could be more welcome in such cases, then, than the cool counsel of economic rationality?

Economists, it is true, do not generally enjoy a reputation as lotharios—unsurprisingly, when the economist’s response to the delicate question of faking orgasms is to reach for the analytical framework of a two-player signaling game. But economists do not dismiss love. On the contrary, we are unorthodox experts in the romantic arts. Economists understand decision-making in the face of uncertainty. We understand the dangerous blandishments of cheap talk and the value of binding commitments.

Above all, economists understand the concept of non-zero-sumgames, interactions in which both sides can expect to benefit from the bargain. When it comes to love, you could even say that we economists are optimists.

September 6, 2003

Dear Economist,

My boyfriend and I have been seeing each other for a while, and last month he moved in with me. It seems sensible for us to put his apartment on the market, but he’s suggesting that we wait awhile in case things don’t work out. What would you advise?

—V.H., via email

Dear V.H.,

Modern living has made it so much more difficult to judge where you stand.

Mothers used to teach their daughters not to believe suitors’ promises that they would still love them in the morning. Then, commitment was made in the form of a marriage proposal. But when courts in the U.S. stopped allowing women to sue for breach of promise, it became traditional to back up those promises with diamonds, a girl’s best friend.

Times have moved on, and it is much more difficult for both men and women to gauge their partners’ seriousness. But if you apply a spot of screening theory to your domestic situation, you will discover exactly where you are. (Screening, the theory of which won enfant terrible Joe Stiglitz a share of the Nobel Prize in 2001, is the art of finding out hidden information by forcing people to act rather than simply murmur sweet nothings.)

If your boyfriend is enjoying the perks of living with you but lacks real commitment to your relationship, then he enjoys a high option value from owning an apartment to which he can return. This is true even if he loves you but doubts the constancy of that love.

If, on the other hand, he is convinced that you will grow old together, the option value of a spare bachelor pad is minimal. The only reason for him to hold on to the apartment is that he thinks it’s a good financial investment. Pundits can argue about the merits of this, but clearly the potential rewards are trivial compared with the loss of his soul mate.

To screen for your boyfriend’s type, you must demand that he sell his apartment at once—claim that the Financial Times has been predicting a fall in prices, if you wish.

The art of successful screening is to impose a demand that one type of person is unwilling to meet. You don’t want to

be sharing a house with that type of person, so put your foot down.

Yours credibly,

The Undercover Economist

February 14, 2004

Dear Economist,

I have a Valentine’s Day problem.

I will be taking my sweetheart out for a romantic dinner, and I know how it will conclude: Juliet will refuse dessert, I’ll order a chocolate cake, and she will proceed to eat most of it. I find it an infuriating habit. Can you offer me any advice?

Yours sincerely,

—Romeo, Verona, Italy

Dear Romeo,

It is safe to say that you will never persuade Juliet to order her own dessert, and ordering two for yourself as a joke is likely to be lost on her. You must take the quantity of cake as fixed and your problem as simply one of division.

This problem is not insoluble if basic utility theory is inventively deployed. Normally, utility theory allows us to choose between spending income on different goods. Your problem is how to choose between two goods: cake for you and cake for Juliet (which will also make you happy, since you love her). Your calculations are complicated by the fact that while Juliet enjoys eating cake, she also enjoys watching you eat cake. Each of you would, given the choice, only eat part of the cake and donate the other part to your lover. But how much to donate?

Fortunately, the economist Ted Bergstrom tackled the necessary equations fifteen years ago. All you need to do is work out how strong your love is for Juliet, compared with your love for cake—and perform the same calculation for her. Substituting the result into Bergstrom’s equations gives you the answer. If you both tend to prefer cake, you will have to split the difference and each concede some cake to the other. If you care little for cake but love to watch each other enjoying it, you will try to foist the cake on each other.

True selflessness comes when both agree, without haggling, what the ideal division of cake should be. Then, love is in the air.

Yours altruistically,

The Undercover Economist

May 8, 2004

Dear Economist,

I am seventy-four, vigorous, wealthy, and boringly married. My girlfriend of eight years, who is thirty-seven, has found a man of her own age of moderate means. She has assets of £300,000 and a salary of about £50,000. I had intended to give her £250,000 and would still do so if she continued a discreet relationship with me. What do you think?

—Mr. Smith

Dear Mr. Smith,

Your plan must overcome two obstacles. First, Milton Friedman’s “permanent income hypothesis” invites us to consider any temporary windfall in terms of the income it could generate in perpetuity. Your payment of £250,000, while substantial, would generate a permanent income of roughly £5,000 at prevailing real interest rates. This is only a modest sum compared with your girlfriend’s salary, although perhaps less modest if she proposes starting a family and living off the income of her new beau for several years. In other words, your offer is serious money to her only if she plans to make a serious commitment to her other relationship—an unfortunate combination for you.

There is a second concern—you cannot write an enforceable contract setting out what you expect for your considerable outlay. It is true that many romantic and sexual relationships have a financial component. However, not many succeed on the terms you propose. They either proceed to implicit long-term contracts, or else are carried out as, ahem, spot market transactions.

You may find it distasteful to pay your girlfriend by the hour or day. Even if you do not, she will. You are likely to have more success sticking to the formula that has stood you in good stead for eight years: keep hold of your money but turn on the charm.

Yours discreetly,

The Undercover Economist

July 17, 2004

Dear Economist,

I’ve kissed a few boys in my time, and I plan to kiss a few more. Eventually, however, I’d like to settle down and have children. How long should I leave it?

Yours sincerely,

Caroline Breyer, Manchester, UK

Dear Miss Breyer,

Your candid query requires a nontrivial application of optimal experimentation theory. Start with a simpler variant: when visiting a regular restaurant haunt, at what point should you stop trying new dishes and simply order your favorite every time?

The answer depends on how much you like your favorite dish, your taste for variety, and how many times you plan to return. If you plan to return often, it’s worth encountering many disappointments on your quest to find a dish that surpasses your previous favorite. If the restaurant is soon to close down, it’s better to stick to your preferred dish for the few visits you have left.

A similar calculation applies to your question, which is complicated by the fact that you do not know with certainty either your rate of accrual of men nor the date at which you can no longer have children. But assume that you are able to “sample” one man every two months, and decide that, whatever happens, you will settle down by thirty- five. At the age of eighteen, you have 102 men to look forward to and should only settle down if you happen upon one in the top 1 percent.

If the years roll by without the appearance of Brad Pitt, you lower your critical threshold. You’ll be encouraged to know that you can keep experimenting throughout your twenties without greatly lowering your standards. Even at thirty, a top 3 percent man will do. But do not wait forever. You may have to settle for an economist.

Yours experimentally,

The Undercover Economist

July 31, 2004

Dear Economist,

I love my partner, but he does not always satisfy me in bed. Sometimes I fake my orgasms—is this wrong?

—Ms. C.H., Nottinghamshire, UK

Dear Ms. C.H.,

Economics doctoral student Hugo Mialon argues that you need to analyze this as a two-player signaling game—a mathematical description of truth and lies. You have two choices—fake, or be honest about the earth’s failure to move. (Mialon comments helpfully: “Faking is the strategy of a devoted girlfriend or courtesan, depending on whether the intent is to spare feelings or gain favors.”) When you appear to be enjoying yourself, your partner also has two choices: to believe you, or not.

The strategy Mialon advises depends on the intensity of your love, and on how likely you are to be enjoying yourself anyway, which in his model is a function of your age. His conclusion: the more you love your partner, and the further you are from thirty (the age at which your partner expects your capacity for orgasm to be greatest), the more you should fake.

I have to confess I found it all extremely complicated. I discussed it with my wife, but that didn’t seem to help anybody very much. Yet several of Mialon’s ideas have been supported by data from the 2000 Orgasm Survey. (Presumably the name is chronological rather than quantitative.)

After much reflection I finally located my doubts. In Mialon’s model, orgasms themselves are exogenous: the players cannot simply try a bit harder to make them more likely. This is an important omission, since one of the main arguments against faking is that it denies your partner the feedback he needs to improve.

Therefore, I have decided to construct my own economic model of the subject.

Meanwhile, my advice is to stop faking orgasms, and instead make sure your partner doesn’t fake his foreplay.

Yours energetically,

The Undercover Economist

February 12, 2005

Dear Economist,

I’ve been seeing my girlfriend for the past three years, and we’ve been living together for the past eighteen months. I just can’t decide whether to propose to her this Valentine’s Day or wait until next year. What would you suggest?

Yours sincerely,

Mr. C. Johnson, via email

Dear Mr. Johnson,

Evidently you intend to marry this lucky girl eventually, since your question implies that whether you propose now or later, the expected net present value created will be positive.

As the poet Andrew Marvell once explained, value-creating moves usually should be made sooner rather than later, since time’s winged chariot hurries near. But Marvell failed to anticipate advances in real option theory that demonstrate that it can be worth delaying decisions to obtain more information. You need to weigh up the cost of delay against the value of waiting to gain new information.

The cost of delay is small if you are young and patient. The value of waiting is large if you have the kind of exciting relationship where every day you learn something new about your belle. This is why young people are often counseled against rash betrothals.

On the other hand, you’ve been living with the girl for a while. Perhaps another year is unlikely to bring important information. If so, what are you waiting for? This reasoning has served your correspondent very well.

There is another important consideration: the window of opportunity for exercising an option can slam shut, in which case the option value is zero. There is no point learning everything you need to know to propose if on Valentine’s Day next year your girlfriend is dating somebody else. Before you decide to wait another year, it might be wise to be sure that she will wait too.

Yours in haste,

The Undercover Economist

March 12, 2005

Dear Economist,

I seem to have a thing about young women. I will not see forty again, and while my friends (the female ones, admittedly) insist that I should be dating sophisticated thirtysomething women with the aim of settling down, I find myself attracted to wild, volatile hell- raisers. There has been Kristen, eighteen, catwalk model; Irene, twenty-two, Swedish law student; Janine, twenty, French heiress; and, most recently, Fleur, twenty-three, polo player (my God). My friends tell me my later years will be lonely, barren, and desperate. Is it worth it?

—H. Humbert

Dear Mr. Humbert,

Contrary to popular belief, economists have an optimistic disposition. We believe that when individuals are free to choose, they find life is full of mutually beneficial interactions, such as the ones you and Fleur enjoy. We also believe that just because something is fun doesn’t mean it cannot last.

The contrary view—the view your friends hold—is that you need to drop Fleur like a hot potato and find yourself a member of the Bridget Jones generation. There are two possible reasons. First, perhaps women, like wine, improve with age. Your friends may believe this, but when it comes to your happiness, your own preferences must be sovereign. Second, perhaps it is worth giving up your playboy lifestyle now to avoid loneliness later.

But I believe that your friends are giving you bad advice because they are jealous. Given that you are already successfully dating people half your age, why will this suddenly stop? Even if your hell- raisers grow tired of you, you may then find that single women of a certain age are a renewable resource. But the most important reason for advising you to stick to girls is my own conscience: I am not sure the sophisticated women of the world could bear to experience your charms just yet.

Yours enviously,

The Undercover Economist

July 2, 2005

Dear Economist,

I believe that there is an inexplicable shortage of sex. Given that studies show that women and men enjoy it more than most other activities, and given its intrinsically low cost, it appears that even a crude approximation of a utility-maximizing person would probably spend much more time having sex than most. Do you know of any economic discussion of this?

—Michael Vassar, New York, USA

Continues...

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Excerpted from Dear Undercover Economist by Tim Harford Copyright © 2009 by Tim Harford. Excerpted by permission.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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