Tim Harford's "The Logic of Life"

Over the past decade there have been a number of enjoyable, popular economics books. The Logic of Life is in fact Tim Harford's second. It's even better than his first book, The Undercover Economist.



The argument of this book is that behavioural economics, while interesting, is not as ground-shaking as it is presented to be. He argues that the classical "rational economics" model still has a lot of life left in it to explain a lot of behaviour that on the surface seems to require some special insight from behavioural economics.

"If you've read some of the criticisms of economics, you may be starting to fear that you're reading a book about an infamous character by the name of Homo economicus, or "economic man." ... Homo economicus doesn't understand human emotions like love, friendship, or charity, or even envy, hate, or anger -- only selfishness and greed. He knows his own mind, never makes mistakes, and has unlimited willpower. And he's capable of performing impossibly complex financial calculations instantaneously and infallibly. Homo economicus is the kind of guy who would strangle his own grandmother for a dollar -- assuming it didn't take more than a dollar's worth of time, of course. ...

But because Homo economicus lies behind many criticisms of economists and rational choice theory, I need to set out how this crude caricature differs from what I mean when I talk about people being rational. ...

Does this mean that rational choice theory is as much as a flat earth theory? No. It's more like a perfectly-spherical-Earth theory. The Earth isn't a perfect sphere... But it's nearly a sphere, and for many purposes the simplification that the Earth is spherical will do nicely."

I love the example he opens with of the rise of oral sex among teenagers. He argues that it is a rational response to a perception of risk and goes through how an economist can find data sets that help unravel this story. He also examines data on Mexican prostitutes and shows that their decisions about safe sex are fundamentally rational and economic.

He has a wonderful bit about "rational ignorance" and why we rationally choose to be ignorant in some situations and how in fact it does allow experienced economic agents to make money off our ignorance. He shows that previous economic experiments failed to pick this out because the toy environments didn't allow for real returns to those with skills and knowledge that could be extracted at the expense of those who don't.

He has a delightful chapter looking at how game theory has made some progress in complex games like poker while the real poker experts continue to maintain an edge established by knowledge and experience. You get to meet the mathematician von Neumann, the poker champion Chris "Jesus" Ferguson, and nuclear strategist Thomas Schelling.

He explains why the appearance of The Pill in the early 1960s was the equivalent of imprisoning a significant portion of the male population and that promiscuity was a rational response. On the other hand, the rise of no-fault divorce in the 1970s forced men to behave better within a marriage because it gave women a credible threat to walk out. Consequently "... Domestic violence fell by almost a third, and the number of women murdered by their partners fell by 10 percent. Female suicide rates also fell. It is a reminder that the binding commitment of marriage has costs as well as benefits."

He explains how "tournament theory" explains why bosses are overpaid and why it is not rational for a large business to pay you what you are worth if you are more productive than your co-workers. As Harford sums up these sad facts of economic life he says:

Some problems cannot be easily solved. After all, I never promised that rational meant "wonderful." Rational choices lock us in situations where your boss will always be overpiad, and the CEO of your company even more so. They also doom you to paying too much when you eat out with twenty other people. But at least you now understand the logic behind it."

He also discusses "rational racism", i.e. how minor prejudices can produce segregation and reinforce racism.

There is also a discussion of why the Internet does not mean the end of cities. And a discussion of how Americans are willing to bid up house prices in desirable suburbs since the price is not just for a house but for the "better schools" that the suburbs offer. At the same time there is a new blooming of urban centers as childless couples make the rational calculation that the amenities of an urban setting outweigh problems with urban crime. He points out how rural areas can exploit urban areas because of the phenomenon of small groups of people using politics to their advantage when they have an obvious benefit and the group can't be swamped by newcomers when the technique to exploit the majority is discovered. Consequently, a sugar subsidy works in the US because you have to own a big farm, i.e. belong to a recognizable group that others can't pile into when a law to subsidize sugar is enacted.

As can be seen by the above, a lot of aspects of life can be explicated by applying economic models to understand the underlying behavior. The idea that fundamentally we are rational and that incentives can motivate us helps explain a great deal that on the surface seems mysterious or puzzling. It makes for a great read. I alway enjoy walking away from a book knowing that I learned something. Of course a book like this is only dipping your toe into a major area of expertise, but it does open your eyes and acts as an inducement to spend more time learning more by dipping more deeply into the available technical literature. Even if you are not an academic, there is something useful to be learned.