The Undercover Economist Answers Your Questions
Last week we solicited your questions for Tim Harford, Financial Times columnist and author of, most recently, Dear Undercover Economist.
You asked him about engagement rings, midlife crises, and of course dental floss (he’s British). Thanks to all of you for the excellent questions and to Tim for his illuminating answers.
My wife and I started dating when we were 18 and were still young when we made the decision to get married. We’re in our young 30’s now. I told my wife that she should feel happy by how fondly I view her, as deciding to get married at a young age means that my opportunity cost of getting married was high, as I had a lot of years ahead of me. She said that’s the second most unromantic thing that I’ve ever said to her. Any suggestions on how I can reword this specific attempt of flattering her? — John
I would recommend introducing your wife to the theory of real option valuation. Point out that the option to marry her was likely to remain open for many years after you originally met. By exercising the option so early, you showed your bride that the net present value of your relationship was large and positive and your uncertainty about the decision was very low. (Translation: your love burned with a strong and constant flame. But why would she need the translation?)
It doesn’t seem rational for a young man to give his girlfriend an expensive engagement ring when he proposes. My thought is that the most efficient use of that dollar is to invest it into something that a young couple would value most e.g. a down payment on a first house, etc. The diamond market is a monopoly and diamond prices are manipulated so that prices are always high. Can you construct a concise and logical argument that young men across the world can use to not buy diamond rings? After all, you already are offering the most valuable thing that you have (your heart) to your soon-to-be bride. In this age, why is a token like an overpriced rock still needed? — Hollins
You have a point. Engagement rings took off in the U.S. when the courts refused to hear “breach of promise” lawsuits. These suits were brought by women who had slept with their fiancés and then been abandoned. These women were then less attractive marriage prospects for anyone else.
Naturally, such lawsuits were sensational fun for the newspapers, and eventually the courts put a stop to the whole thing. The problem then became: how could a young affianced couple have sex with each other when she had no recourse to the law if he changed his mind? Both of them might well want to, but for the lady the risks were pretty high. And so the institution of the engagement ring came about. Such rings are non-returnable, meaning that if the man breaks off the engagement he doesn’t get the ring back. The system discourages him from running off and provides automatic compensation if he does. Very clever.
Given all this history, I tend to agree with you. Tell your girlfriend that you doubt she is a virgin and don’t care much either way, and you will thus be spending the engagement ring money on something more useful. Be sure to let me know how it works out for you.
I have a mid-life crisis project that I would like to undertake. My estimated price tag of this project is $6,000. My wife says that it is too expensive, as she feels that it is quite silly. My response is: “well, it’s cheaper than a convertible car or a mistress.” Obviously, I haven’t done a good job laying out the true cost/value of spending this $6,000 on my project. How else can I present this? — Lenny
Behavioral economists know that people are strongly responsive to the framing of a decision as a loss or a gain. (For instance, when spending $100 to snap up a jacket that is normally $150, are you spending $100 or saving $50?) Your disagreement here is similar. She thinks you are spending $6,000 on something daft. You think you are saving her money. You need her to frame the situation this way too. Bring home catalogues for expensive sports cars and leave them lying around. Push for the car, then withdraw to your original project (What is it? A dungeon? A miniature helipad? The mind boggles), ruefully saying that the sports car is just too pricey. Don’t mention the mistress — although if your wife is a Freakonomics blog reader, it may be too late for that piece of advice.
One of the big challenges in university departments is allocating desk space for graduate students. We have about 75 PhD students and 150 masters students and we’re short about 25 desks in our department. Every graduate student thinks he or she deserves a desk. Some professors insist that their students be granted desk space regardless of whether or not they need it. Those students might not want to work in the building or they are in their labs 99 percent of the time. So we have an inefficient allocation of resources. Here’s the problem: how do we get desk space, a commodity, to those who actually need it? — GW
The economics department in Arizona State University’s College of Business faced almost exactly this problem in the mid 1980’s — there, the scarce resource was offices with windows — and used the obvious solution: an auction. Other departments used a variety of inferior methods, including seniority (despite the fact that many senior professors hardly used their offices) or “first come, first served” (meaning that people who hung around the chairman’s office doing nothing much had first choice). The main objection to auctions, of course, is that they undermine traditional hierarchies and reduce the opportunity for schmoozing and lobbying. You may not see this as an objection, but you can be sure that those at the top of traditional hierarchies do.
So I would recommend the auction. A note of caution, though: non-economists did not understand the merits of the proposal and it was treated as a scandal by the local press. Make sure you, like the good folk at ASU, put the money into a scholarship fund or other unimpeachable cause.
If a reasonably intelligent young person today is looking to make as big a contribution to society as possible, is he or she better off making a small impact on something very large (like federal policy) or picking one particular problem and spending a lifetime attacking it (like curing a disease or improving public education in a country or even city)? — Matt
There is no obvious theoretical answer, but I would urge you to start small for three reasons. First, your idea of “small” seems to be curing a disease or fixing a city’s schools. Most of us would think this was “large,” so anything that keeps your feet on the ground works for me.
The other two reasons are more universal. One is the idea of impure altruism. Most of us do good deeds, but few of us do them solely out of a cool, calculated project to maximize the utility of humankind. We also do it because it makes us feel good and gives us something impressive to talk about on a night out with someone cute. My guess is that more modest projects give us more tangible progress, make us feel better, and encourage us to keep going. If you aimed too high your altruism might shrivel up pretty quickly.
Finally, smaller projects are easier to evaluate. That’s really important; if you don’t measure what works, you might be doing the wrong thing. It would be great to devote your life to making federal policy better, but without proper impact evaluation, you could easily spend your life making federal policy worse. Many people do; believe me, I’ve lived in Washington, D.C.
I am sharing a two-bedroom, two-bathroom apartment with a roommate. The rooms are unequal; there is a much larger master bedroom with an attached full bathroom and a second bedroom with a full bathroom in the hall.
The question concerns room assignment and appropriate splitting of rent. Total rent is fixed (say $1,300). I would like to come up with a process to determine who gets which bedroom/bathroom and a split of the rent which is appropriate, meaning that
1) group utility is maximized and
2) rent is split “fairly” (perhaps differences between WTP and actual payment should be equalized?).
I would recommend the old cake-cutting method: you set the rent for each room, and your roommate chooses which room he’d prefer to take at the rent you’ve set. This, by the way, gives you a small advantage: if you think he’s really committed to privacy, you can push the rent up on the master bedroom in the knowledge that he’ll take it; if you think he’s out to save money, you can get the large bedroom for only a small extra rent. That should solve your problem, but other Freakonomics readers may wish to click on the links to discover what to do with three rooms, or even with eight rooms. (Also: here’s an earlier discussion on this topic.)
My house, which I bought at the height of the boom and also while under duress (read: homelessness) has lost $60,000 in value. I’ve never liked my home nor my neighborhood, and I’m desperate to move, but if I try to sell now (or even in six months?) I’ll lose every single penny I put into it and then some, when you consider taxes, commissions, etc. My thought is to rent it out, go rent an apartment myself, and then sell the house once things get better. What say you? Keep in mind, I hate everything about where I live. I’ve been miserable for 2.5 years and I don’t want to lose my shirt. — I Hate Real Estate
I sympathize with your situation, but you’re thinking about this the wrong way. You say you don’t want to lose your shirt, but you already have: $60,000 worth. Nothing you do now is going to change that.
Here’s another way to think about the problem. Imagine you had no house. Should you take out a mortgage and buy an investment property in an area you hate with the hope that the combination of rent and price appreciation will make this a sound investment? I don’t know the answer, but you need to realize that (taxes and commissions aside) it is the same question as the one you have asked me. You need to forget the painful fact that you have lost $60,000 and simply focus on whether your current house, at its current price, is a good investment. (And if you think an economist can answer that question, I admire your optimism.)
P.S. If you hate it so much, yes, you should move if you can, whether or not you actually sell the house.
Do you floss? How often? — Dutch
I floss only occasionally, for two reasons. First, the dental profession has failed to provide a carefully reasoned, cost-benefit analysis of flossing. Second, I’m British and we like to maintain our tradition of bad teeth.