Sunday, April 5, 2009

The Logic of Life - A Book Review

The Logic of LifeI recently read The Logic of Life: The Rational Economics of an Irrational World by Tim Harford. I generally really like these type of books, books that try to bring economic theory to the masses. Similar books like Freakonomics do a really good job of trying to explain simple economic principles and apply them in very interesting ways.

The book particularly caught my interest because I really would like to believe that people actually make rational choices.  Now that does not mean that I think people make good choices or even sane ones.   This is not what rationality is about.  Rationality, as defined by economist, is about how people respond to incentives.  If you make something more expensive, a rational person will consume less of it.  Make it cheaper, and a rational person will consume more of it.  As they try to decide what to do, they take into account other things in their life, not just this one choice, and they weigh the cost and benefit of this choice amongst the other choices they have.  Now notice there is no value judgment in this definition.  And that is important.  Also note that the cost of something can be more than just monetary; costs can include time, danger, pleasure, etc.  People can rationally make a choice that you and I think is totally crazy because they value something very differently than you or I would.  Having this view on life would allow us to make decisions and policies that would essentially "fix" many problems rather than throwing our hands up by simply creating the right incentives.

The book starts out strong.  It first starts out with an explanation of sex.  With such a start, who would not be instantly pulled in? It explores why oral sex is rising in popularity among teenagers when compared to previous generations (teenagers act rationally to the threat of life threatening diseases like HIV).  The book continues to explore such interesting topics like, "Is Divorce Underrated", "Why Your Boss is Overpaid" and "Is Racism Rational?".  The best parts of the book site either studies that economist  have used to try and add credibility to certain theories or how economic theory can lead to certain surprising conclusions.  Here are some of the better ideas.

  •  The theory of comparative advantage means that men are not typically the breadwinners because they are better at it than women.  They might just be that much worse at helping around the house and being parents.  This might mean that women are actually better at everything but our society just adapted to the fact that women were comparatively so much better at raising the family.

  •   Divorce is a good thing. Studies have show people who are divorced are happier one year after they are divorced than when they were married.  He argues that an increase in divorces might be caused by women having more options than they have had in the past both family and career wise.  Few would argue that this is a bad thing.  This actually could have caused a feedback loop and has made husbands behave better less their partner file for divorce.  Data bears this out as domestic violence has fallen substantially over the last several decades.

  • Tournament theory suggests your boss needs to be overpaid not because she does a good job but because the only way to encourage those under her to perform is to provide a very strong incentive.  At the top, performance is harder to translate into fair compensation and incentives are often misaligned.  This leads to the conclusion that it does not matter what the CEO at a company does.  He could do nothing and it might still be a good idea to pay him the high salary!

  • Ghettos can be caused by perfectly rational people behaving in a way that is not at all racist if people have even the smallest preference to be around people similar to themselves.

  • An interesting experiment took place which demonstrates how random things can lead to big difference in the amount of education any group decides to get and even to what looks on the surface to be racism.  It demonstrated a vicious cycle where one group did not get education because they could not get hired and that group was not hired because they did not get an education.  All of this when all groups started on a perfectly level playing field but through random chance made choices that effected the group later on.

  • Are system of special interest in government is perfectly rational even if it produces results that is bad for all of us.  It is the exploitation of the many by the few but makes sense since a few citizens with a lot to gain will fight much harder than a huge group with very little to lose.

Overall the book is good and worth reading if you have an interest in economics and how little, seemingly inconsequential details can have far reaching effects.  It starts to fade a little bit at the end as the author starts to dive more into theory and less into studies that produce interesting results.  It becomes a lot more speculative at the end rather than concrete, but I believe this was the author's intent.  The book ends kind of disappointingly and kind of abruptly, but overall worth a read if you enjoy economics.

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