Discover Your Inner Economist

Use Incentives to Fall in Love, Survive Your Next Meeting, and Motivate Your Dentist

10/23/2008

By Tyler Cowen

Dutton, August 2007 2007 Hardcover Buy here

Book Review
Reviewed by Julian Reif

How can you tell if a person is lying? Why are some people always late? Where can you find the best food in the world? These kinds of questions were once considered outside the scope of economics but are today often tackled by economists, especially since the publication in 2005 of Freakonomics, a best-selling book chronicling an economist’s research on topics ranging from drug gangs to parenthood. Tyler Cowen, a professor of economics at George Mason University, adds to this budding genre of popular economics with his newest book, Discover Your Inner Economist. He is well known in the economics world as the co-owner of Marginal Revolution, a widely read blog where he posts on eclectic topics running the gamut from Austrian business cycle theory to recipes for Garifuna fish soup. His previous book, Creative Destruction: How Globalization is Changing the World's Cultures, argued that although globalization may reduce the diversity between societies, it increases the diversity of choices available to the individual.

Discover Your Inner Economist is a self-help guide that blends together economics and psychology in order to help individuals grope with everyday issues. How can you make meetings more productive? Force everyone to stand until the meeting is over. Suffer from Taphephobia (the fear of being buried alive)? For $5,000 you can buy a casket with an emergency signal beeper. What kinds of academics insist on being called "Dr."? The least successful ones. (Interested readers have to search online to learn that Mr. Cowen received a Ph.D. in economics from Harvard.) The sheer number of topics discussed means that an overview of this book can only mention a few select items. Consider first lie detection and tardiness.

Psychological research reveals that people think they have the same beliefs and experiences as others, especially for unobservable traits. For example, tax evaders believe tax evasion is common. Consequently, although a liar will not answer a direct question truthfully, you can make him inadvertently reveal information about himself by asking him what he thinks of others. Applied to dating situations, women are thus advised to beware of a man who "says he has had seven partners… but thinks the typical man out there has had thirty."

Mr. Cowen ascribes constant tardiness to insecurity and indecisiveness. Few people relish sitting alone at a table in a restaurant, while showing up to a party after your friends have already arrived allows you to avoid awkward conversations with strangers. If you are fortunate enough to receive multiple invitations, you might wait until the last minute to decide which one best suits your mood (or at least until you hear which party your friends decide to attend).

Becoming a culinary billionaire

Given a choice between dining out in Norway or in Haiti, most of us would probably opt for Norwegian cuisine. Not advisable, according to Mr. Cowen. The large degree of economic inequality in Haiti actually makes for a wonderful restaurant scene. There are enough rich people to create a demand for quality food, which in turn is cooked at bargain prices by restaurants that pay their workers scant wages. A Haitian diner can expect to enjoy the luxury of being attended to by multiple servants. Norwegian restaurants, by contrast, pay high wages and obey strict labor laws.

Mr. Cowen also has advice for diners who would prefer to eat locally: when dining at a fancy restaurant, order the least appetizing item on the menu. The logic is that food items on high-end restaurant menus are carefully chosen. If something sounds unpalatable it is probably quite savory or else the restaurant would not choose to offer it. Safe items like roast chicken, on the other hand, are less likely to be outstanding since they are typically ordered by risk-averse diners who want a taste of the familiar.

Visiting an art museum

People in today’s world have unprecedented access to the arts and music. Watching a movie in the theatre costs less than $10 and is even cheaper if you wait until Netflix offers it. Songs on iTunes cost a mere $0.99 and art museums are often free. Yet, even art aficionados are unlikely to visit museums more than a few times a month. Many of us are too busy to visit museums and even when we do have the time it is difficult to view paintings for more than a few hours per day. How can you make your experience more enjoyable? One way is to pretend that you are an art thief and that your visit is a scouting expedition to determine which painting you would most like to steal. Or, if you prefer to focus on painters besides Raphael and Picasso, imagine you have a small budget and are shopping for bargain paintings. Always skip the first room, which tends to be overcrowded, and at the end of your visit ask yourself which paintings were most memorable. Doing it this way, you will avoid being overwhelmed by all the available art because you are focusing on only a few individual pieces.

Mr. Cowen also argues that museums are not designed to maximize a viewer’s pleasure. Since donors are responsible for the majority of museums’ revenues and artwork, museums put more effort into what donors like–fancy receptions–and less into what visitors want–an enjoyable visiting experience.

More efficient child labor

It is a familiar scene for many parents: they return home after a long day’s work to find a pile of dirty dishes left in the sink by children who were busy snacking and playing video games all afternoon. What is the best way to encourage kids to clean up after themselves? One possibility is to pay them. Unfortunately that solution will probably fail, says Mr. Cowen, because it replaces a filial responsibility with a market relationship. Children will consequently feel less of an obligation to do the dishes. In addition, although having a job confers an aura of independence on a teenager and is considered desirable, getting paid by one’s parents is often viewed negatively. Nobody is impressed with the $25 your parents paid you to mow the lawn. A better solution is for parents to instill a sense of moral obligation into their children.

Rewards can also be detrimental if they cause you to "choke". Many people dread making speeches because they are afraid of making a mistake. That fear often makes them perform worse in public than in private. A large monetary reward can produce similar effects. Imagine that somebody offers you a million dollars to successfully shoot a free throw on the basketball court. Would you be more or less likely to make it?

Salesmen, on the other hand, respond well to monetary incentives in the form of commissions. More generally, monetary rewards should be used whenever effort is an important part of the task and the worker lacks motivation. Paying your wife to spend time with your kids is a waste of money (since she presumably already has the incentive to do so), while car sales will be much improved when commissions are introduced. Money is most useful in professions where it is an important indicator of status, like investment banking. More respect from the banker’s boss is a poor substitute for a higher bonus.

Saving the world

In Blue Blood, a memoir of a New York City police officer’s life, the narrator tries to pay a panhandler for tipping him off to the location of a crack sale. He reluctantly accepts the money:

"Don’t take this the wrong way, but I feel a little funny, since you guys pay out of your own pockets. Do you know how much we make out here, panhandling, during rush hour?"

"No, how much?"

"About a dollar a minute."

"Oh."

Even if the beggars in your neighborhood make substantially less than a dollar a minute, street charity nevertheless discourages them from seeking jobs. What is the best way to avoid this problem, besides foregoing street charity completely? Mr. Cowen suggests donating to someone who doesn’t ask for it. Giving money to penniless Indians peddling garments in the streets of Calcutta succeeds in getting aid to the impoverished without creating perverse incentives.

Any serious analysis of charity must also consider nonprofit organizations, which handle the majority of charitable contributions from individuals. Hurricane Katrina, the costliest hurricane in the history of the United States, destroyed much of New Orleans and killed more than one thousand people. The Red Cross alone raised over two billion dollars from around the world to help deal with the aftermath. On the surface this is commendable, but it is curious that worse catastrophes, such as the killing and amputating of tens of thousands in Sierra Leone’s decade-long civil war, garner scant attention and only a tiny fraction of the aid given to Katrina relief funds. Cynics argue this is because donors don’t actually care about helping others; rather, they just enjoy giving to popular causes or are afraid that not donating will make them appear mean-spirited in front of their peers.

Mr. Cowen supports this cynical interpretation of charity by citing research on charity drives where a wealthy donor pledges to match all other donations at some fixed ratio. One expects that people would donate more to charities where the wealthy donor matches a large amount–say, $3 for every $1 raised–than to charities where the match rate is lower. Research shows, however, that the size of the match ratio has no effect on donations. Assume the research is correct and that public causes are over-funded relative to other, less well-known charities. Surely the logical conclusion is that a concerned donor should reduce her contributions to the next Katrina in favor of Sierra Leone? Quite the contrary, argues Mr. Cowen. Visibly donating to popular causes puts pressure on your peers to follow suit, a positive effect that can outweigh the fact that other less well-known charities may be more deserving of your money.

Even if the cause-of-the-month mentality does not characterize solid, sober people like you, it does apply to many others. So we should hold our noses, join the cause, and talk up what is being done. This will induce more charity from others, especially from the trendy and the image-conscious but altruistically frail.

A discursive but enjoyable read

One of the book’s strengths, the avoidance of tedious mathematics and empirical analysis in favor of intuitive explanations, is also a weakness. A cautionary note from Mr. Cowen concerning the limits of using intuition would have been appropriate, for although intuition provides appealing explanations for many phenomena, intellectual history is replete with examples where it has failed. For instance, many noneconomists do not easily understand that rent control reduces the quality of housing and leads to housing shortages. More complicated phenomena like quantum mechanics are rarely intuitive even to physicists. In these cases we must often refer to diagrams, equations, and scientific studies to obtain certainty. Mr. Cowen’s logic behind ordering the least appetizing item on a menu may be sound but it cannot be unquestionably accepted without a more formal investigation. Another annoyance is that the book jumps errantly from topic to topic while offering only a weak unifying theme, "listen to your inner economist". It is a pity that Mr. Cowen doesn’t expand more formally on psychology’s potential contributions to economics. These are mere quibbles, however, with what is an altogether interesting and enjoyable book that will make you reconsider many daily habits.