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

Tim Hartford is the author of the book The Uncovered Economist. He is a new style economist who looks at everyday phenomenon from the economic angle. The stories in that book cover a few things which we take for granted, but Tim Hartford vividly reveals the underlying economics, much to the surprise of the readers. His new attempt the Logic of Life goes a step further and suggests that there is logic in many life decisions. Contrary to his observation of a life logical, life actually seems illogical at times. Many people do illogical things such as taking drugs, mugging others on the street. Even love sometimes looks irrational; similarly so does divorce. To Tim Hartford, many of these seemingly illogical or irrational actions are being done as a rational choice of the persons. Drawing on statistics, there is a change in the pattern of people doing illegal things whenever the laws, incentives or the environment change. People do accept calculated risks in many areas where we normally consider as irrational behaviour. This concept is in sharp contrast with the book Fooled by Randomness I recently read. In that book, the author shows that there is randomness in our everyday life. Quite often, things will turn out in the most improbable way. A famous phenomenon known as the black swan effect which will catch anyone by surprise, will eventually occur no matter how improbable, at an unexpected time. To this end, Tim Hartford explains that the behaviour of people is governed by their rational choices. However, a rational choice does not mean a probable outcome. Although behaviour is rational, outcome is random. Many may find it illogical that our bosses are always overpaid, and many talents in the office go unrewarded. Tim Hartford explains that the problem of the office stems from the lack of information about who is talented, who is honest and who is hardworking, and pay them accordingly. Different from the measurement of output by piece work or by sales return to the company, office work cannot be measured accurately, particularly under a subjective performance appraisal system. He says managers are just lying weasels. Just look at how many Very Effective appraisals are awarded to EO. The scenario of a large pool of office workers with blurry appraised performance which look very similar to each other is not conducive to work motivation. Thus encouraging any effort at all is going to require a large disparity between what the winners get. Absurdly high pay and perk for the bosses is a logical way to motivate the subordinates. This may not be entirely true for government workers whose pay and perk are largely regulated. But many such examples are found in the commercial world. Another observation is the distribution of household in Washington DC which displays a scenario of racial difference by an artificial demarcation of neighbourhood of blacks and whites. The author introduces an experiment devised by Thomas Schelling,

Increasingly, economics is being used to explain the actions people take outside of their financial lives and then turned into books that are readable and, dare I say, interesting for lay people. Harford's latest work is the best of this crop that I've read so far. What Harford does so well is pick interesting everyday topics, some big and some small, explain the rationale typically used to explain why things are the way they are, and then paint a new picture of what is driving peoples' actions. Harford explains why people will pay more to live in cities and why new tele-commuting technology will make cities more attractive, not less. He digs into the sadly explainable roots of racial discrimination in hiring and why some students are making the rational choice when they conciously decide not to study. The reasons may surprise you, but you will enjoy his explanations and frequently end up nodding in agreement or shaking your head in frustration with the inescapable but lousy conclusions. The greatest thing about Harford's book is how clearly it demonstrates the value that economics can deliver. Done right, economics is a powerful tool for identifying the root causes of both good and bad trends. If a trend is good (Harford explains historic growth in wealth) you can learn how to promote it further. If a trend is bad (the decline of a city like New Orleans or Detroit) you can figure out how best to deal with it. Economics gives its users a tool for objective, clear thinking that is tough to come by. Highly recommended for anyone who wants to develop their thought process. You'll come away a smarter voter, wiser consumer of news and thinking more clearly all-around.

This book works because it takes a simple concept,that rational choice underlies much of human behavior, and that many of our seemingly intractable problems have been produced by fairly mild and even rational individual decisions. I urge you to begin the book by reading the section on "rational racism," which I found in many ways the most compelling (and disturbing) part of the book. Harford actually begins the book with a discussion of apparently worrying teenage sexuality that turns out to be more encouraging than you might think possible. In doing so he reminds us that many of the things about which we worry,and about which commentators with big audiences shout shrilly, can be explained in a much clearer way by looking carefully at the rational decisions that produce them. A great book and a fun read.

I think that I have read all of the recent "economics of everything" (Harford's phrase) books and this one is, in my view, the best. I also try to keep up with recent research in applied economics and found some gems in these pages that I had missed. The author alludes to about 200 papers and books from recent economics research and presents them in the most reader-friendly way, all in about 200 pages. I call that very efficient. Harford's summary is also a useful antidote to all the "behavioral economics" that the popular press has picked up. The idea that some of us depart from rational choice on occasion is hardly news. The point of this book, that the rational choice model, has amazing power range is worth reiterating.

A lively and thought-provoking follow-up to Harford's debut book The Undercover Economist, which used textbook economics to throw new light on everyday life. In this second book Harford moves well beyond the textbook to take us on a tour of some cutting edge research and thinking that's emerging from what he calls a "new breed of economists". Among them is Steve Levitt, whose Freakonomics popularized the notion that economists can have interesting things to say about areas you wouldn't normally expect them to be poking their noses into - but Levitt is only one of many academic researchers who are cheerfully roaming over other people's turf from their economics labs, so Harford's book serves as a timely overview of a newly sexy subject. The result is a startlingly diverse collection of insights and anecdotes which are all held together by one central premise - that you can explain a lot about life by starting from the simple assumption that people are fundamentally rational. This is not an uncontroversial assertion - among the "new breed of economists" are those melding economics with psychology into a fledgeling discipline of behavioral economics, which focuses on our irrational quirks. Harford's view is not to dismiss these human foibles, but to argue persuasively that they shouldn't be overstated, and that in most important situations we behave rationally - that is, subconsciously evaluating costs and benefits and responding to incentives - to a remarkable extent. Harford's writing is a joy to read, especially when he's impishly puncturing pomposity - my favorite is the "why your boss is overpaid" chapter, which discusses several theories that could rationally explain the obscenely high wages commanded by modern CEOs (hint: none of them are "because they're worth it"). One great lesson made clear by this book is that individually rational decisions can lead to socially horrible outcomes, a conclusion never clearer than in the discomfiting chapter on "rational racism". It's a valuable reminder that economics is a means not an end - rational choice theory doesn't dictate what society should be like, rather it teaches how we can harness rationality by changing incentives to shape the society we want.