undercover+economist

Undercover Economist Reviewed by Peymaun Kia

The //Undercover Economist//, is about, well an undercover economist. Tim Harford basically goes around and uncovers various aspects of the economy. The topics range from why a cappuccino is $3.50 at Starbucks, despite only costing about $0.92 for them to produce, to the stock market, and the health care system issues. Whether or not Harford actually went “undercover” to reveal the information in this book, I have no idea, but it would be safe to say that he did go undercover to some extent. The book is actually quite interesting and rather similar to //Naked Economics//, which we have already read most of. The book begins with a discussion of coffee shops and the power of scarcity. Which leads to the revelation that the only reason Starbucks coffee cost so much, has to do with the fact that a large majority of people are willing to pay for it, and it is scarce. This scarcity (not that coffee is actually scarce, but that they have chosen locations that create a scarcity) gives Starbucks, some of the power that allows them to charge so much. While Harford goes on about scarcity for quite a while, I would prefer not to, so we will move on. While scarcity is important for helping a merchant to charge higher prices for his goods, another important factor is price targeting. For example, you go to the grocery store and you are in desperate need of some ranch dressing for a party. Now, right in front of your face for $3.50 is a bottle of Kraft ranch dressing, you grab the bottle and rush to the cashier. However, had you paid more attention, you would nave noticed that on a lower shelf, in a uglier bottle, there is a generic ranch dressing, of equal quality for $1.25, maybe less. This is called price targeting, most people will not look hard enough, or they think the Kraft is worth the extra money. The pricing in Starbucks, happens to work exactly the same way. The products are essentially all the same, same ingredients, same quality, similar in cost to produce, and yet, so vastly different in price. This is all because of the consumer, often times the consumers are willing to pay a greater amount for coffee, than they should be because they think it is worth it. In other words, it would maximize their utility. Now all this might make Starbucks seem like a big jerk of a corporation, but you can not blame them entirely. After all, most people cannot survive without coffee and it is not like the information about how much the coffee really costs is not out there (it is, in this book after all). On that bombshell, we move on to another topic in the book, the truth. Yes, the truth, more importantly, information about the item and how much you value said item. The thing is, in a transaction, the two sides often do not have equal information. A prime example, used car sales, the salesman knows if the car is good and what it should be sold for, you do not know these things. In the book, Harford covers this in detail and discusses all the effects it has on the economy and how it eventually ties in with health insurance. The thing is health insurance has to do with managing risk and the insurance companies do not know how much of a risk you are, according to Harford. It turns out that the reason health care is so expensive is because, a lot the people who do not really need it are not willing to pay enough to cover all of the people that need very expensive medical treatments. Also, the United States spends approximately $1,000 per capita for administrative costs related with health insurance. However, in Singapore, where the life expectancy and “healthy” life expectancy is actually higher than in the United States, they spend less than $1,000 for their health care for a year. Clearly, our system is not the most efficient way to get things done. Harford has tons of reasons why our system fails, while other systems work and the problem with each, but mainly it comes down to information and the nature of markets. One of the more interesting segments was about investing in the stock market and how the irrational and unpredictable nature of those investing in the stock market, keeps the market predictable. Although it does not make sense at first, if you read the chapter, you begin to understand what he is getting at with this point. Basically, if the investors knew everything there was to know about the market, the market would behave in a completely erratic manner. However, since investors do not know everything and are not completely rational in their decisions, the market is more predictable. Here is a segment that portray what Harford means about irrational investments:

===A modern day example is the “Grolsch” method of picking shares. I met an investor who told me he had bought lots of shares in the brewer Grolsch, because he'd been to lots of parties around the City of London and Grolsch beer was being served at all of them. Other beers, which had previously been popular, like Stella Artois or Heineken, seemed to have disappeared from the scene.===

Obviously, this is not the most intelligent way to make investment decisions, as Harford goes on to explain. Harford goes into greater detail about investing methods and the effects of scarcity and the behavior of the markets. Including discussions about the actions of various people, some of which turned out to be quite smart, and others who, like the investor mentioned above, did not make the best decisions. While what I have summarized does not even cover half of this book, I hope that it gives you some idea of not only the range of topics Harford discusses, but also, the depth to which he covers each. I barely scratched the surface in this summary. This book goes on to covers other topics like, why poor countries are poor, the effects of traffic, why China is rich, globalization, and more. Despite covering so much information, and being so thorough, it is not a boring or difficult book to read. While it is not what I would call a fun read, it does really make you realize how much the world around you is dictated by various simple economic principles, and it will not make your head spin. Perhaps, that's the greatest thing about this book, it is ridiculously easy to understand, even if you aren't in AP Economics. Harford himself said, “The economy isn't a bunch of rather dull statistics with names like GDP”, and when you read his book you realize that this is actually true. The one thing that is a little odd with this book is that the book to me seemed to end somewhat randomly. Harford's closing had to with China almost being rich (this was written in 2005), and how the economy has to do with the people and the choices they make, in this case a lady named Yuan Li. I think a country other than China, or a more global stand would have been better, but it is not that big a deal. All in all, I'd say you should consider reading this book, its better than most other books I have read, and if you care about the economy, well why not not read it?