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The Logic of Lifeby Tim Harford
Nowhere, you might think. But a new kind of economist is starting to prove that life makes more sense than you would ever have expected. The new economics grabs any tool that works: a brain scan, a giant social experiment, or the hidden patterns in an old map. Its leading experts are discovering the rational behavior in the apparently irrational world that surrounds us.
This is a departure for economics not because economists have always steered clear of social issues, but because the subject has moved from the realms of pure logic into data detective work.
That detective work was what made Freakonomics such a success. But although the star of Freakonomics, Steven Levitt, is one of the most respected economists around, he's just one of many who are doing ground-breaking work. Most have snuck under the radar screen of economics commentators.
Economists have long believed that "people behave rationally." But while that used to be a dusty-dry mathematical statement, it is now a subtle and powerful account of human psychology, and it is based on surprising and sometimes dramatic evidence.
When I wrote The Logic of Life, I wanted to tell the story of this new type of economist, and I wanted to use it to show us our daily lives in a new light. Whether you are trying to climb the corporate ladder, or to get a date on Friday night, once you discover the hidden logic behind the trials of daily life, you begin to see everything differently. I cannot promise that the picture will always be pretty, but I can promise that there is always something new and different to see.
Let's take a look again at those initial examples. The juvenile tearaways first: Many people argue that criminals especially young criminals simply can't grasp the risks of punishment. If prison works at all, goes the theory, that's only because the bad guys are locked up, so they can't break into your home.
But teens have a closer eye on the legal system than you might imagine. Most states have harsher systems for dealing with adults criminals than the young, but the gap is wider in some states than in others. In the states where the difference is particularly big, potential criminals rapidly clean up their act quickly when they become old enough to go to an adult prison. Yet in the states where adults and juveniles are treated in almost the same way, they behave in almost the same way. You might be afraid of that kid in the gang colors, but the evidence is that he's a rational criminal.
The heavy drinkers, too, are more rational than you would expect. When taxes on alcohol rise, people cut back on their drinking, and that won't come as a surprise. But what is surprising is that it is the alcoholics who respond more to high prices than anyone else. The evidence comes from looking at medical records: when alcohol prices rise, cases of liver damage fall off a cliff. Nobody would claim that alcoholics are in complete control of their actions, but again, the evidence is that some, at least, know when the habit has become so costly that cold turkey becomes rational.
As for the prostitutes, economists have discovered through careful interview programs that working girls will often leave the condom in the purse in exchange for a pay rise of about a quarter. Foolhardy? The astonishing thing is that the danger money negotiated by the prostitutes seems to be comparable to the premium in pay received by soldiers, firefighters, lumberjacks and other people in dangerous professions. The prostitutes risk their lives for money but it's a disturbingly well-calculated risk.
Although each of these examples focuses on the darker side of life, that is not unusual. One of the features of the new economics I explore in The Logic of Life is the way that individual rationality can produce socially irrational results. For instance, think of the way a city tends to segregate itself into the toniest neighborhoods and the ghettoes. In the hands of the new economists, a computer model shows how this outcome can emerge from individually rational decisions.
Of course, people do not always behave rationally. The Logic of Life shows the bizarre ways in which we trip over the decisions that lie in front of us. And yet, it is striking that these mistakes are not at all commonplace they are unusual and they are often subtle, and often arise when we are confronted with something totally unexpected. By contrast, when dealing with the daily choices we make in our relationships or our jobs, we can subconsciously make staggeringly complex decisions about what is to our advantage.
In The Logic of Life, I show that traders, procurement managers, poker players, and soccer professionals are able to solve complex problems without even knowing that they're doing so. Top soccer players have been shown by economists to mix up their penalty kicks according to the fiendishly-complex strategies prescribed by economic theory. I don't think it's because they've solved the equations; instead, like the rest of us, they've left the job to their subconscious.
If a professional soccer player like David Beckham is smart enough to figure out economic theory, then so am I, and so are you. The calculations take place without us realizing. And it is their subconscious logic that shapes our apparently-illogical world.
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Tim Harford is the author of the bestseller The Undercover Economist and The Logic of Life and a member of the editorial board of the Financial Times, where he also writes the "Dear Economist" column. He is a regular contributor to Slate, Forbes, and NPR's Marketplace. He was the host of the BBC TV series Trust Me, I'm an Economist and now presents the BBC series More or Less. Harford has been an economist at the World Bank and an economics tutor at Oxford University. He lives in London with his wife and two daughters.