Q. What kinds of lessons can we draw from The Invisible Hook in dealing with modern pirates?
A. We have to recognize that pirates are rational economic actors and that piracy is an occupational choice. If we think of them as irrational, or as pursuing other ends, we’re liable to come up with solutions to the pirate problem that are ineffective. Since we know that pirates respond to costs and benefits, we should think of solutions that alter those costs and benefits to shape the incentives for pirates and to deter them from going into a life of piracy.
The Visible Hand
(SDL)
Let’s say you were in the market for an iPod and wanted to find a bargain, so you searched in a local online market like Craigslist to find one. Would it matter to you whether, in the photograph of the unopened iPod, the person holding the iPod (all you can see is their hand and wrist) was black or white? What if the hand holding the iPod had a visible tattoo?
I suspect that most people would say that the skin color of the iPod holder wouldn’t matter to them. More people likely would say the tattoo might keep them from responding to the ad.
Economists have never liked to rely on what people say, however. We believe that actions speak louder than words. And actions certainly do speak loudly in some new research carried out by the economists Jennifer Doleac and Luke Stein. Over the course of a year, they placed hundreds of ads in local online markets, randomly altering whether the hand holding an iPod for sale was black, white, or white with a big tattoo. Here is what they found:
Black sellers do worse than white sellers on a variety of market outcome measures: they receive 13% fewer responses and 17% fewer offers. These effects are strongest in the northeast, and are similar in magnitude to those associated with the display of a wrist tattoo. Conditional on receiving at least one offer, black sellers also receive 2–4% lower offers, despite the self-selected—and presumably less biased—pool of buyers. In addition, buyers corresponding with black sellers exhibit lower trust: they are 17% less likely to include their name in e-mails, 44% less likely to accept delivery by mail, and 56% more likely to express concern about making a long-distance payment. We find evidence that black sellers suffer particularly poor outcomes in thin markets; it appears that discrimination may not “survive” in the presence of significant competition among buyers. Furthermore, black sellers do worst in the most racially isolated markets and markets with high property crime rates, suggesting a role for statistical discrimination in explaining the disparity.
So what can you conclude from this study? The clearest result is that if you want to sell something online, whether you are black or white, find someone white to put in the picture. I suppose you could say that advertisers figured this out long ago, and actually go one step further, making sure the white person is also a good-looking blond woman.
It is much harder, in this sort of setting, to figure out why buyers treat black and white sellers differently. As the authors note, there are two leading theories of discrimination: animus and statistical discrimination. By animus, economists mean that buyers don’t want to buy from a black seller even if the outcome of the transaction will be identical. That is, buyers wouldn’t like black sellers even if black sellers provided exactly the same quality as white sellers. With statistical discrimination, on the other hand, the black hand is serving as a proxy for some sort of negative: a higher likelihood of being ripped off, a product more likely to have been stolen, or maybe a seller who lives very far away so that it will be too much trouble to meet in person to do the deal.
The most impressive part of this paper by Doleac and Stein is their attempt to distinguish between these two competing explanations, animus versus statistical discrimination. How do they do it? One thing they do is to vary the quality of the advertisement. If the ad is really high quality, the authors conjecture, maybe that provides a signal that could trump the statistical discrimination motive for not buying from the black seller. It turns out that ad quality does not matter much for the racial outcomes, but possibly this is because the quality difference across the ads isn’t great enough to matter. The authors also explore the impact of living in an area with more or less concentrated markets, and also across places with high and low property crime. Black sellers do especially bad in high crime cities, which the authors interpret as evidence that it is statistical discrimination at work.
I really like this research a lot. It is an example of what economists call a “natural field experiment,” which has the best of what lab experiments have to offer (true randomization) but with the realism that comes from observing people in actual markets, and with the research subjects unaware they are being analyzed.
Black and White TV
(SDL)
In Freakonomics, we mentioned in passing that blacks and whites in the U.S. have very different TV viewing habits. Monday Night Football is the only TV show that historically has been among the top ten in viewership for both blacks and whites. Seinfeld, one of the most popular white shows ever, was never in the top fifty for blacks.
So I was intrigued when I happened to see a recap of prime-time Nielsen ratings broken down by race.
The top ten shows for whites:
1. CSI
2. Grey’s Anatomy
3. Desperate Housewives
4. Dancing with the Stars
5. CSI: Miami
6. Sunday Night Football
7. Survivor
8. Criminal Minds
9. Ugly Betty
10. CSI: NY
And for blacks:
1. Grey’s Anatomy
2. Dancing with the Stars
3. CSI: Miami
4. Ugly Betty
5. Sunday Night Football
6. Law and Order: SVU
7. CSI: NY
8. CSI
9. Next Top Model
10. Without a Trace
If this one week of data is a good indicator (and I think it is), there has been a remarkable convergence in television viewing habits. A few years ago, almost all the top black shows featured predominately black characters and most were not even on the big-four networks. Now there is almost a perfect match between what blacks and whites are watching, and while many of these shows have black characters, none feature a predominantly black cast.
Does this convergence in TV viewing signal a broader pattern in cultural convergence? Probably not, but it is worth keeping an eye on.
Amid all the change, however, one thing seems to be as certain as death and taxes: both blacks and whites will watch football if you put in on in prime time.
How Pure Is Your Altruism?
(SJD)
There have been a pair of huge natural disasters in recent weeks: a cyclone in Myanmar and an earthquake in China, each of which killed tens of thousands of people.
Have you written a check yet to donate to either cause? I seriously doubt it.
Why do I say that? Before looking at these recent tragedies, first consider three natural disasters from recent years, listed below with number of fatalities and amount of U.S. individual charitable donations (according to Giving USA):
1. Asian tsunami (December 2004)
220,000 deaths
$1.92 billion
2. Hurricane Katrina (August 2005)
1,833 deaths
$5.3 billion
3. Pakistan earthquake (October 2005)
73,000 deaths
$0.15 billion ($150 million)
Americans gave nearly three times as much money to Hurricane Katrina relief as they did for the Asian tsunami, even though the tsunami killed many, many more people. But this makes sense, right? Katrina was an American disaster.
Then along comes a terrible earthquake in Pakistan, killing seventy-three thousand people, and U.S. contributions are only $150 million, making the $1.92 billion given after the tsunami look very generous. That’s only about $2,054 per fatality in Pakistan, versus an approximate $8,727 per fatality for the tsunami. Two faraway disasters b
oth with huge loss of life—but with a huge disparity in U.S. giving. Why?
There are probably a lot of explanations, among them:
1. Disaster fatigue caused by Katrina and the tsunami; and
2. Lack of media coverage.
Do you remember coverage of the Asian tsunami? I am guessing you do, especially because in addition to hitting poor areas, it also struck high-profile resorts like Phuket. Do you remember coverage of Hurricane Katrina? Of course. But what about the Pakistan earthquake? Personally, I remember reading a couple of brief newspaper items but I didn’t happen to see any coverage on TV.
Consider a recent paper by Philip H. Brown and Jessica H. Minty called “Media Coverage and Charitable Giving After the 2004 Tsunami.” Here is their rather startling—if sensible—conclusion:
Using Internet donations after the 2004 tsunami as a case study, we show that media coverage of disasters has a dramatic impact on donations to relief agencies, with an additional minute of nightly news coverage increasing donations by 0.036 standard deviations from the mean, or 13.2 percent of the average daily donation for the typical relief agency. Similarly, an additional 700-word story in The New York Times or Wall Street Journal raises donations by 18.2 percent of the daily average. These results are robust to controls for the timing of news coverage and tax considerations.
And what causes one disaster to get a lot of coverage while another doesn’t? Again, there are probably a lot of factors, foremost among them the nature of the disaster (i.e., how dramatic/telegenic is it?) and location. Getting back to the recent disasters in Myanmar and China, I’d say there are a few other things worth considering:
1. We are in a season of heavy political coverage in the U.S., which is hard to dislodge from the airwaves.
2. Covering faraway disasters is time-consuming and expensive, which becomes doubly prohibitive when media outlets are in cost-cutting mode.
3. Neither Myanmar nor China (nor Pakistan) has what one would consider a very high Q Score among Americans. I am guessing that most Americans couldn’t find Myanmar on a map, and if they have any impressions about the country at all, they are not good impressions (think “military junta”).
Indeed, donations to Myanmar so far are very, very low. Considering how unevenly disaster aid is often distributed, maybe this isn’t so terrible. But still: if you are the kind of person who donates money to people in need, isn’t the family of a cyclone victim in Myanmar as worthy of your charity as anyone else? The political or narrative forces of a disaster shouldn’t change our response to the need, should they?
We might like to think that we donate almost blindly, depending on need rather than our own response to the particulars of a disaster. But the growing economics literature on charitable donations shows that isn’t the case. In a narrow but very compelling piece of research, John List argued that if you are trying to solicit donations door to door, the single best thing you can do to get large donations is to be an attractive blond woman.
I thought of this research when the NFL was raising money in a weekend telethon after Hurricane Katrina. Between games and during half times, the league had star players manning the phones. Relative to how many people watch football, the amount of money the league raised was pitifully small. I wondered if they would have done a lot better by using cheerleaders to solicit donations instead of the players.
So given the particulars of the disasters in Myanmar and China, as tragic as they are, I feel pretty confident in predicting that U.S. charitable contributions in each case won’t be very large. It may be that the only kind of altruism that truly exists is what economists like to call “impure altruism.” Does this mean that human beings are shallow and selfish—that they only give to a cause when it is attractive to them on some level? Will the future produce some sort of “disaster marketing” movement in which aid agencies learn to appeal to potential contributors?
The Economics of Street Charity
(SJD)
Not long ago I was having dinner with Roland Fryer and our significant others. For some reason, talk turned to street charity. The conversation was so interesting that I thought we’d pose a street charity question to a few other folks. Their answers are presented below (and, FWIW, at the very end you can see what Roland and I thought).
The participants are: Arthur Brooks, who teaches business and government at Syracuse and is the author of Who Really Cares: The Surprising Truth About Compassionate Conservatism; Tyler Cowen, an economist at George Mason who writes books and maintains the Marginal Revolution blog; Mark Cuban, the multifaceted entrepreneur and Dallas Mavericks owner; Barbara Ehrenreich, author of the low-rent classic Nickel and Dimed and many other works; and Nassim Nicholas Taleb, the noted flâneur and author of The Black Swan and Fooled by Randomness.
Here is the question we put to each of them:
You are walking down the street in New York City with ten dollars of disposable income in your pocket. You come to a corner with a hot-dog vendor on one side and a beggar on the other. The beggar looks like he’s been drinking; the hot-dog vendor looks like an upstanding citizen. How, if at all, do you distribute the ten dollars in your pocket, and why?
ARTHUR BROOKS
We face this situation all the time—both literally and figuratively. If you live in a city, you are frequently confronted by needy winos. Do you give to them, or not? In your heart, you fear that they will just ruin their lives further with your pocket change. But it feels hardhearted not to give.
This dilemma goes beyond just how we treat the homeless. In our public policies, we see parts of the population which, we fear, might become dependent on the government “dole” if we provide that kind of help to people in need. Some even argue that whole nations can lose their self-sufficiency through foreign aid. This is why we have metaphors about giving fish versus teaching people to fish, and so forth.
Furthermore, some people worry a lot about the dignity of folks in need. For some, that means we should give them whatever they ask for. For others, it means charity is degrading and no good, and should be replaced totally by government programs.
As the Inuits say, “Gifts make slaves, as whips make dogs.”
So how does all this help me figure out what to do as I approach the tipsy beggar and the upstanding hot-dog vendor? I have to figure out whether I care about a) the desires and sovereignty of the beggar; and b) the impact and effectiveness of my gift to do good in the world. There are four possibilities, with four different associated actions:
1. I care about the beggar’s sovereignty, but not the impact of my gift. I give him some cash, which he will probably spend on booze. But hey, we all have free will, right? I didn’t force him to buy booze instead of food.
2. I care about the impact of my gift but not the beggar’s sovereignty. I buy him a hot dog—or better yet, I donate the money to a cause to help the homeless.
3. I care about both the beggar’s sovereignty and the impact of my gift. This is the toughest case, and usually involves the futile exercise of trying to convince the beggar to “get some help.” Imagine trying to have an intervention on the street.
4. I don’t care about either the beggar’s sovereignty or the impact of a gift. This is the easiest case of all. I buy myself a hot dog and ignore the wino. Put some kraut on that and give me a Diet Pepsi, too.
Which is my choice? I usually take number two, unless I’m feeling really lazy or I’m with somebody who knows I write books about charity—in which case I sometimes choose number one.
TYLER COWEN
I’m not keen on giving the money to the beggar. In the long run, this only encourages more begging. If you imagine a beggar earning, say, $5,000 a year, over time would-be beggars would invest about $5,000 worth of time and energy into being beggars. The net gain is small, if indeed there is one. It is rumored that in Calcutta people cut off body parts to be more effective beggars; that is a polar example of this phenomenon. I explain this logic in more detail in my book Disco
ver Your Inner Economist.
Oddly, the case for giving to the beggar may be stronger if he is an alcoholic. Alcoholism increases the chance that he is asking for the money randomly, rather than pursuing some well-calculated strategy of wastefully investing resources into begging. But in that case, I expect the gift will be squandered on booze, so I still don’t want to give him the money.
If I liked hot dogs, I would buy a hot dog from the vendor rather than giving him the money for free. At the end of the day, he’ll probably throw out food. He’s going to get the money in any case, so why waste a hot dog?
A third option, only implied in the question, is to simply rip up the money. This will make the currency of others worth proportionately more and spread the gains very broadly. Since many dollar bills are held by poor foreigners (most of all in Latin America), the gains would go to those who are able to save in terms of dollars. This would include many hardworking poor people, a group I regard as worthy recipients.
I have two worries about this option, however. First, drug dealers and other criminals hold lots of cash—why should I help them out? Second, the Federal Reserve might (if only in the probabilistic sense) reverse the effect of my actions by printing more currency.
The bottom line: buy a hot dog.
The second bottom line: don’t exercise your charity in New York City.
When to Rob a Bank: ...And 131 More Warped Suggestions and Well-Intended Rants Page 23