Sunday, April 19, 2009

Logic of Life-3


My first post on this book was a short review, while the second post had excerpts from one chapter, interspersed with my comments.
This last post on the book also contains excerpts from a few other chapters, and again interspersed with my comments.
To recap, the book is a big disappointment. If you have read Tim Harford's first book, "The Undercover Economist", this book seems so bad it is hard to accept that the two were written by the same person. The book also has a Freakonomics hangover, which by itself is not bad, except that the book does not compare with Freakonomics either.
Many chapters start out promisingly, but then meander away into mediocrity. Chapter after chapter after chapter. Whether it is the chapter on gambling, or on workplace compensation, or on urban neighborhoods, or on the linkages between innovation and population. It is not that the prose is poor. No. It is that incredibly frustrating feeling you get that these chapters could have been so much more illuminating, insightful, and just better. That the author can write better than he has. But for some reason he chose the path of mediocrity. Laziness perhaps?

The Logic of Life: The Rational Economics of an Irrational World

Why Your Boss Is Overpaid
Now who would disagree with a chapter title such as that? Except for the boss, of course. Who doesn't like to think that their bosses are clueless stereotypical bumbling characters straight out of a Dilbert cartoon, while they themselves are hard working, diligent, underpaid, overworked honest do-gooders?
Such perceptions are repeated so often and by so many people that they have acquired a reality all of their own. Some of it is rightly so, some not so. But perhaps, one of the biggest gripes that most employees have is why their boss is so overpaid. Many employees would think that the optimal salary for their bosses should be a whole number one less than the least non-prime integer, but bosses are inclined to think the same about many of their employees.

Isn't it a fact that most people will not venture out publicly and proclaim that their bosses are overpaid, yet rage in private against the perceived excess of their compensation and paucity of skills. Or as the author eloquently muses:
But why is office life so frustrating? Why do your colleagues stab you in the back while your idiot boss is paid a fortune for lounging around behind a mahogany altar? And why do your undoubted talents go unrewarded? [page 88]
When I wrote "performance pay encourages performance," I was right, but with a crucial hidden premise--that performance can be measured, and thus rewarded. [page 92]
Take the case of software companies. How do you measure performance? If you are a developer, is it by the number of lines you code? That surely is the surest way of guaranteeing horrible code. If you are a quality assurance engineer, responsible for testing a part of a product to ensure that the shipping product is of good quality, and if you are measured by the number of bugs you file, well... that doesn't work quite well either. You could well have a QA engineer file bugs that are cosmetic in nature, like a control that should be two pixels to the right, or an image that does not display a tooltip, while ignoring the fact that the software increasingly uses more and more memory till all the memory made in Taiwan would not suffice. If you are a product manager, it gets even more interesting. You could focus on the mechanics of the job, of making sure that all the cells in a tracking spreadsheet are uptodate, while ignoring the creative aspect of the job, driving the product into mediocrity and irrelevance while the market innovates and moves ahead. Ditto for user interface design. And so on...
Yet an attempt to pay for performance was outwitted by the great pole vaulter Sergei Bubka. He was paid a cash bonus every time he broke the world record, and so he was motivated to beat his previous marks by the smallest increment possible rather than aim for his best jump. Bubka often broke the record by a single centimeter. The bar steadily crept upward until the mid-1990s, when Bubka was past his best and was unable to beat his most recent height. [page 95]
Also, remember that performance is relative. It is never absolute. It is measured on a relative scale. It is rewarded on a relative scale. Relative means that you are better if your coworkers look worse than you. Period. Simple as that. Unfortunately.
Once you start handing our large quantities of cash to people for outperforming their peers, they will work out that there are two ways to win this game: Either do a great job or make sure your colleagues do a bad one. [page 97]
...
Tournament-style incentives make it perfectly rational for workers to stab one another in the back. [page 98]
...
If you want to introduce a tournament-style system of promotion and performance pay for your subordinates, all you need to do is work out whether each worker's efforts to improve his or her performance will outweigh his or her efforts to drag down everyone else's. [page 98]
How else do employees may consider improving their relative performance? By appearing competent in front of their managers. How many times have you seen employees appear 'smart' when their boss or their boss's boss is visiting? Heck - I have done that. I have seen others do that. No rationalization, no justifications. This is the way the game is played. At all levels. This is precisely so they one can appear 'good', and competent, and better than their peers. This is usually a time-tested strategy that does not require much hard work over a sustained period of time. The downside is that soon enough everyone catches on to this strategy, in which case your brown-nosing skills cease to be a competitive advantage.

MBA-ishly speaking, and strictly speaking, brown nosing should be seen as nothing more than a tactical advantage. Analogous to a price advantage. It is imitable. It cannot be a source of strategic advantage. However, there are innumerable people who confuse the two, and find out soon enough that it soon enough ceases to be a source of differentiation.
Another surprising outcome is the way in which many workers appear to be rewarded simply for being lucky. [page 98]
Not much you can do about this, can you? If success is being in the right place at the right time, then there is certainly an element of luck involved. The person who joined Google in 2007 may not be much different in terms of skills, or knowledge, or ability to work hard versus the person who joined in 2002. However, as far as money goes, the difference could be millions of dollars. The person who joined in 2002 may have been granted options priced at $20-$50, and could have cashed them in 2008 at a price of $700. Even 2000 options at that price would result in a pre-tax profit of $1.3 million. And these are options for only one year. As opposed to someone who joined in 2007, awarded options priced at $600-$700, and watched those options swiftly sink underwater. The same would hold true for a company like Microsoft: a person who joined in 1995 would have been granted options priced at a (split adjusted) price of $5. A person joining in 2000 would have received options priced at $45-$50. The price in April 2009 hovers around $20-$25.

Las Vegas - The Edge of Reason
Gambling is about taking chances. And game theory is about formulating, at least at some idealized level, a theory to help people understand what to do in such cases. A brief history of the evolution of the science of Game Theory at the hands of John von Neumann is included.
With an excellent hand, you should bet: You lose nothing if your opponent folds, while giving yourself a good chance of winning a big pot if he calls. But with a middling hand, you shouldn't bet: If he has a bad hand, he'll fold, and you'll win the ante, which is what you'd have won anyway by checking; but if he has a good hand, he'll call and win. [page 38]
...
What about with a terrible hand? ... Checking would be unwise, because the hands will be compared and you will lose. It actually makes more sense to bet with these bad hands, because the only way you will win anything is if he drops out, and the only way he might drop out is if you make a bet. Perversely, you are better off betting with awful cards than with mediocre ones, the quintessential (and rational) bluff. [page 38]
...
"Of the two possible motives for bluffing," wrote von Neumann in Theory of Games, "the first is to give a (false) impression of strength in (real) weakness; the second is the desire to give a (false) impression of weakness in (real) strength." [page 38]
The purpose of this second chapter is however not very clear. There is a dash of game theory, a tiny sliver of talk on the 'winner's curse', some discourse on poker and championships, but just what is the chapter attempting to tell us? Not very clear. You have to plod on for pages before the discourse turns interesting when he talks of addictions. But this also just peters out, fast.
Addiction, said Becker and Murphy, is entirely rational. People who consume addictive products---cigarettes, alcohol, slot machines---calculate that the pleasure of the habit will outweigh the pain. [page 53]
...
Economists have also found that advertising for nicotine patches and gum seems to encourage nonsmoking teenagers to smoke. That's easy to explain if teenagers are rational: The advertisements tell them that there are new ways to help them quit, so rationally it is less risky to begin the habit. [page 55]
Is Divorce Underrated
This is by far the best chapter in the book. The start is simple enough. He shows how changes in demand and supply can lead to bargaining power quickly sliding into the hands of men, at least in an idealized setting. And how that also seems to hold true in the real world.
What it does show is that we are more fussy when we can afford to be and less fussy when we can't: Crudely speaking, when it comes to the dating market, we settle for what we can get. [page 66]
We can imagine that a father's role in raising children, primarily, was to provide and protect: perhaps the most able hunters would have been in the most demand as long-term partners, or the strongest fighters, or the canniest at making political alliances. All these attributes would have translated into high status. And in modern times, we have a very reliable indicator of high status: wealth. [page 72]
Think about the above paragraph for a moment. Isn't this what also happens in the employment world? Your prospective employer looks at your current salary as an indicator of your true worth. You may well be good enough to deserve a $150k salary, but if you are earning $75k at your current company, even if you were to ace all your interviews with the prospective employer, he is not likely to offer you a $150k salary, exceptions notwithstanding. $100k maybe. $120k in extreme situations. And unless there is a huge imbalance in the supply and demand, $150k is not your paycheck.
Consciously or not, plenty of women seem to have decided they would rather compete for scarce wealthy males than move where the males are poorer but more plentiful. Manhattan's women may constantly grumble about the lack of marriageable men in the city, but it is their rational choice not to relocate to Alaska. [pages 73, 74]
It seems that a high barrier to marriage infidelity would have been the risk of getting pregnant, or of getting the partner pregnant. Well... it turns out that the contraceptive pill lowered that barrier, significantly.
Even in India, there are companies hard at work at trying to lower these barriers. The solution is an emergency contraceptive pill (see side-effects, blog, or the company web site). The target market is not the married couples who may end up with an unwanted pregnancy in the family. Or the rural or urban poor for whom the consequences of an unwanted pregnancy are more severe, and who are more likely to not use appropriate precautions. The first market is not large enough to target, while the second market is not lucrative enough.
The advertising is crouched in almost noble terms, but the goal at the end of the day is really to encourage more out-of-marriage casual sex between people. The logic is simple: the probability of an unwanted pregnancy is proportional to the number of sexual encounters between partners who do not desire a pregnancy. The goal is to raise the number of unwanted pregnancies. Which will create demand for the product. You cannot really go around advertising the benefits of marital infidelity or teenage sex. So you use surrogate advertising. Shameful? Perhaps. Unethical? Maybe. Rational? Yes. Profitable? For sure yes.

Anyway.

On to the book and how the contraceptive pill and education combine to make things slightly worse for women:
In fact, rational responses to the pill have had effects remarkably similar to those that come from imprisoning a significant chunk of the male population. [page 76]
...
The contraceptive pill also makes it easier for men to get sex outside of marriage. The logic of evolutionary psychology says that women should be choosy about whom they have sex with, because pregnancy in the wrong circumstances is extremely costly--but the logic of a woman who has control of reliable contraception is quite different. The preferences that evolution has shaped still exert a powerful influence on our instincts, and many women remain extremely choosy and refuse to have sex outside marriage. But others, once armed with the pill, decide they can afford to have a little more fun.
The choosy ones are unlucky: The existence of other women who are a little freer with their favors weakens the bargaining power of the Madonnas, and means that men have less incentive to marry. Some men will not bother at all, feeling that they can get all they want from a playboy lifestyle. Or they may delay marriage until middle age, cutting down on the pool of marriageable men and increasing male bargaining power. ... With highly educated women in excess supply, men have realized that they can get sex, and even successful offspring, without ever moving too far from the recliner and the potato chips.[page 76, 77]
The theories of comparative advantage, long used to justify outsourcing and freer international trade, can also be used to explain why the women may be a better choice when it comes to taking care of the kids at home.
It is a harsh truth about the world of work that for many professionals, the more work you have done in the past, the more productive each additional working hour becomes: a perfect example of economies of scale.
This means that a household in which both parents work part-time on their careers and part-time looking after children and the home does not make rational economic sense. Two halves are much less than a whole. Economies of scale dictate that, logically, one partner should apply himself or herself full-time to paid work. [page 81]
...
There is no reason to believe that men were breadwinners because they were any good at it. They might simply have been breadwinners because getting them to help around the house would have been even worse. [page 82]
Any linkage between divorce and a career for women? Sure:
That started a second reinforcing loop (some people regard it as a vicious circle). Because divorce was conceivable, women preserved career options. But because women had career options, divorce became conceivable. It became less and less likely that a woman would end up trapped in a miserable marriage out of pure economic necessity. [page 84]
One of the biggest benefits of divorce should not come as a surprise to anyone. After all, the perpetrators of domestic violence are more often than not bullies, and therefore cowards. As long as the victim does not have a viable option of retaliation, the violence continues.
... economists Betsey Stevenson and Justin Wolfers discovered a chilling example of the way that the increased availability of divorce empowered women. ... By giving women an exit option, they gave men stronger incentives to behave well inside a marriage. The result? 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. [page 86]
The World Is Spiky
This chapter tries, somewhat successfully, somewhat turgidly, that cities are where innovation is more likely to happen, simply because there are more people there, more smart people talking with and meeting more smart people. The converse is true. Once smart, successful people start abandoning a city, the cycle becomes self-reinforcing.
When transport costs fall, rational people don't spread out into the countryside, they cluster together in cities, or at least in suburbs. [page 160]
It is not hard to see what kind of person is rationally attracted by a city with cheap houses but no good jobs: people who have already retired, or people with few skills, or people whose skills were once in demand but have fallen out of favor because of technological changes or global competition. ... but highly skilled people value the opportunities provided by a dynamic city, even though the cost may be high. Hedge
fund partners don't move to Detroit to save on rent. ...
The result is yet another rationally self-reinforcing trend, this time a vicious circle: Struggling cities attract people with low skills, which means that they are unlikely to create the sort of exuberant innovation seen in more successful cities; and the more that modern economies depend on people with skills, the more serious and insuperable these disadvantages are likely to become. [page 169, 170]
The same is the for schools, right? Government run public schools in India used to be where everyone sent their kids to study. A slight drop in quality, infrastructure, teaching staff, and a slight rise in private schools meant that some parents withdrew their children from government schools and put them into these private 'public' schools. Some students here did well in board examinations. Which increased the exodus from government schools. Even parents who otherwise would have been unable to afford private schools looked to send their kids to private schools, to give them any advantage, real or perceived, to help them get ahead in the hyper-competitive world of India. Which meant that there was no dearth of supply of dubious quality schools.
Per square mile, cities certainly do produce more pollution. But per person, the story is different. Manhattanites go shopping for their groceries on foot. They live in tiny apartments and have little space to accumulate clutter. They use public transportation much more than other Americans, consume gasoline at the tiny rate that the rest of America did before the Great Depression, and travel past countless homes and offices using the world's most energy-efficient mode of mass transport: the elevator. [page 172]
This argument can also be applied within cities to the choice between apartments and houses. Houses are a luxury, and certainly, in cities the prices of houses reflects the reality. But more than that, apartments afford luxuries to people in a collective manner that would otherwise be unaffordable to all but the most affluent. Tennis courts are a rarity in Indian cities. Private clubs offer them; at exorbitant prices. Most large apartment complexes have at least one. Wooden badminton courts are the same. Amenities that are typically not available to the average resident in India.

A Million Years of Logic
I argue that the answer lies in the age of European exploration and conquest-not, as often believed, because the exploitation of Africa and the New World directly enriched Europe, but because the trading opportunities empowered a merchant class with a strong interest in creating laws and institutions that provided incentives for economic growth. [page 195]
This last chapter is an absolute apologia for western imperialism, and quite shameful an effort. The so called merchant class that is alleged to have had an interest in creating laws and institutions was no more than a band of thugs who had an incentive, motive, and the lack of a conscience to do whatever it took to establish colonial rule in countries like India, China, and elsewhere, whether it was by lying, cheating, deceit, genocide, atrocities, bribery, thuggery, or worse. True, locals like Mir Jaffar and Jai Chand were aplenty to help the imperialist causes, but that should in no way mitigate the culpability of the European imperialists. As far as the question of living standards go, Indian GDP was several times more than the GDP of England, the living standards in India were on the average far better than that of the Englishman, and famines were once in a century occurrence before English colonialism took hold, as opposed to a famine every decade afterwards.

The prosperity of medieval India meant that there was a well-established system of a rule-of-law that meant that the worker, the artisan, the farmer, expected to get a fair deal for his produce, and had an effective system of redress. Imperialists like the English who came to India wanted laws and institutions that they controlled, laws that they wrote, and institutions that facilitated a systematic loot of India by the English. What was required was a system that was defined by the English, run by the English, and that dispensed justice in favor of the English.

So yes, to that extent it can be argued that the European colonialists had a rational reason to establish a rule of law that empowered a merchant class (read Europeans) and provded incentives for economic growth (read European economic growth). That minor point is conveniently omitted by the author.

This last chapter only serves to makes a mediocre book simply atrocious.
Kremer suggests simply taking population growth as a measure of technological progress: The faster the human population is able to grow, the more advanced technology must have become. [page 211]
There seems to be something seductively true about this statement, but also something suspiciously wrong too. Think a bit and you will see that population growth rates have been declining the world over. In the west as well as in countries like India and China. I didn't say that the populations are declining, but that the human population is growing at a slower rate. That would imply that technology is no longer progressing as fast as it did, say, 50 years back. Looking back at the last twenty years this postulate seems to be very obviously wrong.
  • Paperback: 272 pages
  • Publisher: Random House Trade Paperbacks; Reprint edition (February 10, 2009)
  • Language: English
  • ISBN-10: 0812977874
  • ISBN-13: 978-0812977875
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