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The Lively and Logical Logic of Life
Boredom drives a lot of academic research. After you've studied a subject for decades, it isn't much fun to keep repeating the standard lessons, so you mischievously start looking for counter-examples and loopholes. Unfortunately, when the mischievous academic talks to a broader audience, he often leaves the impression that the standard lessons are a waste of time. Frankly, I think that a lot of recent popular economics books fall into this trap.
Tim Harford's The Logic of Life is a welcome antidote. Harford argues that the standard economic assumption of human rationality usually works. In fact, it works in a lot of cases where you might think it doesn't.
The best example in chapter 1 is condom use by Mexican prostitutes. It's easy to say "A prostitute would have to be a brain donor not to use a condom every time." But Tim demurs. By bargaining about condom use, instead of using every time, prostitutes raise their income by about 25%. Still not worth it? Think again:
In fact, the prostitutes know that while the risks are real, they are modest. Only one in eight hundred Mexicans carries HIV, and even among prostitutes it afflicts just one in three hundred. Even if a prostitute is unlucky enough that one of her unprotected jobs is with a man who is HIV positive, the risk that she will catch it is less than 2 percent if one of them is carrying some other sexual infection, and less than 1 percent otherwise...
As far as we can tell, the typical Morelian prostitute is acting as though she valued one extra year of healthy life at between fifteen thousand and fifty thousand dollars or up to five years' income.
Tim may sound like a typical insensitive economist in this quote, but he's firmly in the Alan Blinder "hard heads, soft hearts" tradition:
[A] rational world is not necessarily a wonderful one... Rational individuals can make choices that are bad news for others; risky sex is just a particularly clear example. And when rational individuals face a miserable set of choices, as do the Morelian prostitutes, they cannot do better than pick the best of a bad lot. We will not solve social problems if we pretend that they are caused only - or even mostly - by the mad, the stupid, and the morally degenerate.
As an academic, I'm tempted to immediately highlight a counter-example. Morelian prostitutes value a year of healthy life at up to five times their annual income. But what about Levitt and Dubner's drug dealers who risk their necks for minimum wage? Aren't they irrational?
But for now, I'm going to resist the temptation to dwell on counter-examples. You've got to learn to walk before you can learn to run. And you've got to understand rational explanations for human behavior before you can understand irrational explanations. The Logic of Life may well be the best introduction to the rational choice approach on the market. Even better, it's well-written enough to inspire even jaded academics to get back to basics. Bravo, Tim.
Posted by Bryan Caplan on January 23, 2008 at 07:41 AM in Books | Permalink
Comments
Agree with you 100% Bryan ... Harford has written a great book that demonstrates to the reader the power of the economic way of thinking.
Posted by: Peter Boettke at Jan 23, 2008 8:40:42 AM
I bought the book for my brother to participate in this book club. He is a high school economics teacher. He brought it to school yesterday to read that first chapter assignment. Before he could, one of his students needed something to do in study hall, so my brother gave him the book and told him to start reading.
Suffice it to say that the page one "blow job epidemic" was a big hit with the student and I'll let you know whether my brother keeps his job.
I guess rather than mischievous loopholes, some economists look for outlandish support for the theories. I'm not complaining...just observing.
In any case, mischief and outlandishness in economics are probably two more examples of rational choice, aren't they?
Posted by: Pete at Jan 23, 2008 8:40:46 AM
I believe the odds of a prostitute getting AIDS are far greater due to adverse selection. HIV positive males may look for reckless prostitutes, since for them the cost of unprotected sex is much smaller for them than for other males (the cost being the condom-free sex premium plus the discounted value of treating AIDS and shorter life span).
Meanwhile, there's also a moral hazard problem. HIV positive prostitutes may charge a smaller premium for unprotected sex.
Nonetheless, the game is still rational.
Posted by: Lucas at Jan 23, 2008 9:03:11 AM
Bryan Caplan – You are very kind, and given your expertise it is restrained of you not to discuss (yet) chapter eight on rational voting. Let me expand on one of your points, though. It is certainly true that rational choice theory is not new. The two biggest influences on the book are surely Gary Becker and Thomas Schelling, both of whom – albeit in very different ways – apply the rational choice perspective to non-commercial areas of life. Both have been forcing people to sit up and take notice since the 1950s. I’d be proud enough to write a book that translated Becker’s theories into everyday English and added some nice anecdotes. But I have tried to do a lot more than that with “The Logic of Life”: while the theory is well-established, what is new is the evidence. We don’t need to take Becker on faith any more, and much of the evidence has arrived within the past few years. The ideas of Daron Acemoglu, Ed Glaeser, Lena Edlund, Justin Wolfers, Dan Ariely and Betsey Stevenson all have their turn in the spotlight. The first paper to be discussed in the book is due to be published only this spring. The book is aimed at anyone who’s curious about the world, but I think even a professional economist would find fresh ideas and new evidence.
On the rationality of Levitt and Venkatesh’s cast of characters, more to follow...
Posted by: Tim Harford at Jan 23, 2008 9:24:33 AM
Pete – Sorry that your brother was caught out. A couple of people have raised eyebrows about the research on teenage sexual behavior. Perhaps it’s all about expectations. This stuff has all been discussed everywhere from Oprah to Atlantic Monthly to the op-ed page of the New York Times, usually with much hand-wringing and very few facts. Nobody seems to find that inappropriate. When an economist adds to the discussion, suddenly it is shocking.
In fact, “The Logic of Life” devotes only four pages to the subject, brings facts to the table and presents a rather optimistic view: because sex is getting riskier, teenagers are being more careful. Sure, I could have opened the book by talking about something else, but I think it’s a (rare) responsible discussion of an important topic.
Posted by: Tim Harford at Jan 23, 2008 9:27:08 AM
I have begun reading the book and enjoy it very much, BUT there is a major problem with assuming rationality in human behavior: if we assume that people are rational ALL THE TIME, then how can we possibly ever make a falsifiable prediction, which is the essence of science?
Rest assured, I am willing to assume rationality for the sake of mathematical simplification, but this assumption must run the risk of falsification from time to time to be serious. This is why the counter-examples are important
Posted by: enrique at Jan 23, 2008 9:36:59 AM
The drug dealers who risk their necks for a very low return may seem irrational to people sitting up there collecting a paycheck. But if you ask who else will hire a ghetto kid with no education who speaks a lower-class version of English and who may have a record, you have a clearer view of his choices.
Then add that he gets to carry a gun for his own protection, whereas the fast food worker is a sitting duck for whatever robbers are in the neighborhood.
On top of that, the drug dealer may be too young to be legally employable, or why runaways end up either stealing or in prostitution.
As you said, the best of a miserable set of choices.
Posted by: Pat Mathews at Jan 23, 2008 9:37:33 AM
"As an academic, I'm tempted to immediately highlight a counter-example. Morelian prostitutes value a year of healthy life at up to five times their annual income. But what about Levitt and Dubner's drug dealers who risk their necks for minimum wage? Aren't they irrational?"
They are rational, at least by the argument Levitt and Dubner make. One of the main arguments of their book is that people act in their perceived self-interest; in this example they explain this seemingly irrational behavior with the idea that these drug dealers see this life as one of their only avenues for success.
Posted by: Jonathan Gaynor at Jan 23, 2008 10:01:14 AM
"As an academic, I'm tempted to immediately highlight a counter-example. Morelian prostitutes value a year of healthy life at up to five times their annual income. But what about Levitt and Dubner's drug dealers who risk their necks for minimum wage? Aren't they irrational?"
Another possibility for this behavior is that serving as a foot soldier in a gang can be viewed as a rational gamble that they'll end up at the top of the heap someday themselves, in the same way that lots of would-be actors, directors, dancers and so forth accept staggeringly poor working conditions and pay for the chance to be one of the lucky few that make it.
Alternatively, being a gang member may provide non-money compensation in the form of protection...
Posted by: David Otaguro at Jan 23, 2008 10:41:20 AM
Apologies, didn't read the "irrational" link above, where you suggest that the gambling-for-great-success idea is glib and less compelling to you than the idea that people are just irrational.
I think you might be conflating "based an a fundamental lack of understanding of the real chances of success" with "irrational". That's reasonable in some ways... making decisions based on bad information isn't really rational, but it's also a touch facile to say that the only rational acting is that based on accurate information.
I don't feel like Logic of Life was saying rational in the sense that it's logical and perfectly-reasoned, but rather rational as in "not perverse", or "not deliberately acting self-destructively". Maybe even, "trying to maximize their potential gains within the limitations of their information and cognitive capacity".
I guess this is where the "perceived self-interest" comes in... acting on perceptions (as opposed to reality) naturally introduces flaws into reasoning and is itself not completely rational.
I also don't think he's arguing that individuals are rational actors (which I seem to recall him disclaiming explicitly), but rather that in aggregate, people tend to act rationally. But I'm not sure you were saying that in any case.
Posted by: David Otaguro at Jan 23, 2008 11:00:00 AM
In response to Pat Mathews's excellent comment. He/she wrote:
The drug dealers who risk their necks for a very low return may seem irrational to people sitting up there collecting a paycheck. But if you ask who else will hire a ghetto kid with no education who speaks a lower-class version of English and who may have a record, you have a clearer view of his choices.
Then add that he gets to carry a gun for his own protection, whereas the fast food worker is a sitting duck for whatever robbers are in the neighborhood.
On top of that, the drug dealer may be too young to be legally employable, or why runaways end up either stealing or in prostitution.
Add to that the fact that the minimum wage may price him out of jobs with a more-certain, safer future, and it may be even more rational than thought.
A black friend and I agreed, during the O.J. Simpson trial, that if we had a son, we would rather he be a drug dealer than be a leech like Kato Kaelin. At least he'd learn how to do math.
Best,
David
Posted by: David R. Henderson at Jan 23, 2008 11:04:08 AM
@Tim - I remember reading about the BJE (perhaps one of your columns?) and agree completely that the treatment is appropriate. Just to be clear, I found my brother's story amusing, nothing else. Certainly, he could have done a better job reviewing the contents first.
Posted by: Pete at Jan 23, 2008 11:04:35 AM
Sorry, I don't see why we should regard the prostitute's behavior as "rational" unless you beg the question by regarding all economic transactions as rational.
By what standard is the behavior "rational?" Would you still regard it as rational if the premium were 10%, or 5%, instead of 25%?
Posted by: Bernard Yomtov at Jan 23, 2008 11:06:17 AM
Bernard is putting his finger on a critical issue, namely what rationality means in the argument (this may apply as much to Bryan as to Tim). One notion of rationality is that the person made the right decision and chose the right margin. We don't have much evidence for that in these cases. Another notion of rationality is that the person's action is susceptible to "pattern prediction" in the sense outlined by Hayek. I view parts of Tim's book as embracing that approach. Another notion is that the person had *some reason* for doing what he or she did; that approach strikes me as too weak to be useful. At times I worry a bit that Tim is coming too close to that approach. Yet another approach is to use rationality, not as a description of the person's behavior, but rather as a description of how the economist should proceed, namely by classifying behavior into the dual categories of preferences and constraints. That tends to be my own approach and I think it is found in Tim's book as well.
Posted by: Tyler Cowen at Jan 23, 2008 11:32:40 AM
So far, I have found the book to be immensely enjoyable. I am curious about the rates of STI infection offered in the first chapter. You state, as evidence that life as a Mexican prostitute is less than pleasant, that one in six prostitutes has a sexually transmitted infection; this seems incredibly low to me. One in five Americans has herpes (although I believe this figure includes oral herpes which may or may not be sexually transmitted) and, depending on whose figures you believe, as Americans age their chances of contracting HPV skyrocket. This leaves out assorted other STIs as syphillis, chlymidia, etc. If prostitutes have STI rates lower than the average sexually active American, that is something interesting indeed.
Posted by: Trey at Jan 23, 2008 11:35:27 AM
I suspect Dubner and Leavitt's drug dealers don't just receive a minimum wage for their troubles. They get receive a surrogate family and social status as part of the package.
Posted by: Dwight at Jan 23, 2008 11:58:57 AM
I think there's also a moral hazard issue in the BJE. Yes the kids are practicing a safer sex relative to other sexual activities. But does this prospect of a "safer sex" lead more kids to begin sexual activity at a younger age? I won't pretend to know what the ideal age to begin sexual activity is, but to say that kids are becoming safer I think you have to show that those kids choosing oral sex are choosing it over regular sex and not over no sex.
Posted by: Ben at Jan 23, 2008 12:10:58 PM
I've started this book after a discussion of The Origin of Wealth, and I wonder if Bryan thinks this is an example of new work that challenges the usefulness of the traditional economic lessons. There has been no mention in Tim's book so far of computer simulation and modeling as new economic tools, and I'm waiting for possible tie-ins. In Origin, I found especially compelling the results that a community of rational actors could produce chaos in a market.
Posted by: Aron at Jan 23, 2008 12:38:30 PM
Tyler writes:
Yet another approach is to use rationality, not as a description of the person's behavior, but rather as a description of how the economist should proceed, namely by classifying behavior into the dual categories of preferences and constraints. That tends to be my own approach and I think it is found in Tim's book as well.
In this case, there seems to be no such thing as "irrational" behavior. There is only behavior we don't understand.
That's well and good, but Bernard/Enrique's points about falsifiability comes into play.
I guess you would follow up by saying that "X is rational" is not a very content-ful statement, it's more like a reminder to look for motives.
So, you can't prove or disprove "X is rational." What you can prove or disprove (and this is where the science comes in) is whether the individual really acts so as to maximize Q given constraints XYZ.
So, the name of the game here is, "who can come up with the most accurate model of human behavior."
"Just so stories" are a trap here, as they are in evolutionary biology. We are positing the underlying mechanism behind what we observe, but to be good scientists we need to make sure that our guess about the underlying mechanism gives us new hypotheses, which future observations can confirm or refute.
Posted by: mk at Jan 23, 2008 1:30:48 PM
As a followup, to respond to Tyler's qualm (from many posts ago) about Neuroeconomics often not having a clear scientific purpose: If one of the goals of economists is to accurately model human behavior, then cognitive scientists, AI researchers, and yes neurologists all need to come to the party.
The hope, presumably, is that there may be a tighter causal link between brain-states and actions, compared to the maybe weaker causal link between self-reported-mental-states and actions.
Posted by: mk at Jan 23, 2008 1:36:22 PM
"...teenage fellatrices..." Ha!
Posted by: stan at Jan 23, 2008 2:26:16 PM
Politicians risk the long-term economic and politcal health of this country everyday for short-term election results by cutting deals with labor unions at the expense of other workers, supporting monopolies like public education that deliver inferior products, and giving taxpayers money to ponzi schemes like social security that will eventually bankrupt this country.
Posted by: jorod at Jan 23, 2008 2:31:39 PM
Tyler Cowen wrote:
One notion of rationality is that the person made the right decision and chose the right margin. We don't have much evidence for that in these cases.
I'm a computer scientist, not an economist, but it occurs to me that it wouldn't necessarily be required for the prostitutes to choose a margin. Having decided to offer such a deal to customers, they could in theory learn over time what choice of margin maximises their profits.
Posted by: Dom Camus at Jan 23, 2008 2:32:45 PM
I wasn't too convinced by Harford's assertion that our brains are carrying out complicated calculations unconsciously when catching a baseball. We may acquire an intuitive feel for some Newtonian physics after observing examples of projectile motion. But if you ask me to estimate how fast my half-spherical salad bowl would fill up under a running faucet, I think my intuition would fail miserably. (it could just be that I'm stupid)
However the discussion on rationality does remind me of this passage by David Friedman:
There are lots of ways to behave rationally without reasoning your way to it. Whether or not you have logically deduced that in order to live you must eat, if you don't eat you won't be around long to have your behavior analyzed by economists. So evolution is one source of rational behavior. Trial and error is another. I have never run a map of Santa Clara through my computer, but i think I know the shortest way home from my office.For a familiar example of rational behavior without reasoning, consider the situation of an infant--with only one tool available for achieving his objective. when he is hungry or wet, he makes loud and unpleasant noises--giving any adults in the vicinity an incentive to deal with the problem. I doubt that babies think through the logic of their situation--but they take the action most likely to achieve their ends.
Friedman then goes on to proclaim that babies are rational, which I think would be debatable in light of the previous commenters' input.
Posted by: Biomed Tim at Jan 23, 2008 2:45:41 PM
Having decided to offer such a deal to customers, they could in theory learn over time what choice of margin maximises their profits.
How could they learn that? They might learn how to maximize revenues, but I don't see how they can learn to maximize profits when the cost is reduced expected lifespan.
Yet another approach is to use rationality, not as a description of the person's behavior, but rather as a description of how the economist should proceed, namely by classifying behavior into the dual categories of preferences and constraints. That tends to be my own approach and I think it is found in Tim's book as well.
I don't really understand this. Are you suggesting that economists should simply study behavior as the choices that get you the greatest utility subject to given constraints? If so, then "rational" becomes a meaningless term, doesn't it? (How do we determine preferences?) I suppose you could argue that a given set of behaviors is rational if it does not imply inconsistent preferences, but then no single behavior is rational in itself. Anyway, I suspect if you dug deep enough you would find very few individuals who are rational in this sense.
Posted by: Bernard Yomtov at Jan 23, 2008 3:11:28 PM
