The Logic of Life

The Logic of Life

Tim Harford


Chapter 1 Introducing The Logic Of life

The economics of sex, crime and Minnie Mouse

“Rational people respond to incentives: When it becomes more costly to do something, they will tend to do less; when it becomes easier, cheaper, or more beneficial, they will tend to do more.

In weighing up their choices, they will bear in mind the overall constraints upon them: not just the costs and benefits of a specific choice, but their total budget.

And they also will consider the future consequences of present  choices.

The controversy only comes only when people realize that economists are not restricting their brand of analysis to straightforward financial transactions, such as buying cars. Cost is not just about money.-The cost of sex includes the risk of Aids and the risk of unwanted pregnancy; of cost rises, you’ll tend to choose a safer kind of sex.

(Same goes to future cost of addiction to cigarettes-just as much as your loan repayment-future consequences.)

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.

First, I do not suggest that people are wholly self-interested or obsessed with money. People are motivated by all kinds of normal human emotions- a fear of Aids or parental disapproval, romantic love or racial hatred. These motivation are not financial, and not always selfish-but our response to them are rational.

Second, I do not argue that we have consciously calculating mind. We do make complex calculations of cost and benefits when we act rationally, but we often do it unconsciously, just as when someone throws a ball for us to catch, we aren’t conscious of our brain solving differential equations to work out where it’s going to land.

Third, I do not argue we are blessed with omniscience or perfect self-control. Homo economicus never regrets ordering dessert- he has infallibly weighed the fleeting gustatory pleasure against the likely effect on his girth. In reality, there are a clear limits to our ability to calculate, think ahead and see our way through certain cognitive traps. There are also limits to our willpower- we make resolutions and then we break them.-we are often too quick to label  behavior as irrational.

Fourth, I do not deny that humans, unlike our infallible friend Homo economicus, have irrational quirks and foibles.- it is incredible to find evidence that sexual orientation responds to incentives.

People make different choice depending on how the choices are framed.

Imagine that the US is preparing for the outbreak of an unusual Asian disease, which is expected to kill 600 people. Two alternatives programs to combat the disease have been proposed. 

Assume that the exact scientific estimate of the consequences of the programs are as follows:

To one group, these choices are offered:

If program A is adopted, 200 people will be saved.

If program B is adopted, there is 1/3 probability that 600 people will be saved, 

and 2/3 probability that no people will be saved.

Which of the two programs would you favor?

To second group, these choices are offered:

If program C is adopted 400 people will die.

If program D is adopted there is 1/3 probability that nobody will die, 

and 2/3 probability that 600 people will die.

Which of the two programs would you favor?

The choice between A and B is exactly the same as the choice between C and D. 

That is not hard to see once the two choices are laid out side by side. Yet which programme the subjects chose depended on how it was described. Most subjects preferred to save one-third of people for certain (Programme A) ,rather than taking the gamble to save everyone (Programme B).

But change the framing and the choice changed, too; most subjects would accept a two-thirds risk of killing everyone (Programme D) rather than be certain that two-third of victims would die (Programme C). 

This preference reversal is clearly irrational, because nothing about the costs and benefits of the two treatments changed,but people’s choice did. –the subjects have made inconsistent choice

Minnie Mouse

People suddenly value objects more highly simply because they own them. They won’t trade even when logic suggests they should. Economists call this “endowment effect”

You have a nice bottle, that have been growing in value-say that 40 pounds,-even though you have no interest for buying it for 40 pounds, -you just unwilling to sell that for that price.

This isn’t a rational behavior, because rationally you either prefer the bottle or you prefer the money, but not both.

Chapter two Las Vegas

Reverse bluff: acting weak when you’re strong.

You shouldn’t decide without considering his response, and he should not react to your bet without figuring out what strategy you have.

Chapter Four Why Your Boss is Overpaid

Publisher want to offer contracts that pay authors more money when they sells  more books partly because it encourages authors to write good books and energetically promote them. Performance pay encourages performance.

Workers  get the same salary even when they works harder or leisure. Workers was supposed to be lept in line by peer pressure; if they installed a faulty windscreen then another worker from the same repair shop- one who know very well who had done the bad piece of work-would had to fix his colleagues mistake.This thought to have a more effective than a direct financial incentive to get things right for the first time.

Workers were rational. If you paid them more to install more windscreens, they would install more windscreens. And if you made them work without pay to fix their own shoddy workmanship, they would take care not to make mistakes.

Whether or not people work harder if surrounded by productive colleagues.

The answer is yes: When a quick worker sits next to you, you immediately start scanning your items more quickly. And you do because you don't want to be accused slacking, rather than because you are inspired by their speed.

Checkout staff do not speed up when they are looking at fast colleague-that would not be rational. They only speed up when fast  colleagues are looking at them.

Boss-gives incentive to –the best workers-by turning workplace to a tournament-he doesn’t specify what he means by an excellent performance.

They will work  out two ways to win the game: 

either do a great job or make sure your colleagues do a Instead, there is a limited fund for bonuses: the better you look relative to your colleagues, the less they  will get and the more you will get.

bad one.

Tournaments motivate workers very well indeed; unfortunately, they motivate backstabbing as well as dedication.-so what you need to do is work out whether each worker’s efforts to improve his performance will outweigh his efforts to drag down everyone else.

The more luck is involved in work, the larger the pay gaps need to be between the winners and the losers if the tournament is to motivate everyone.

So, workplace tournament encourage workers to sabotage one another and to demand higher bonuses if success is largely a matter of luck