How to sex up economics

Financial agony aunt Tim Harford. Photo / Supplied

While economic theories can relate to household budgets and other common monetary matters, you wouldn't expect them to pertain to affairs of the heart. However, according to Tim Harford, they can be applied to a wide range of everyday scenarios.

The financial agony aunt writes a problem page in the Financial Times, the best of which have been collected in a book, Dear Undercover Economist.

Every week, the London-based journalist answers reader's queries about everything from the chances of winning the lottery to the science of speed dating. Occasionally, he has even taken his own advice.

"I'll do that if I can't figure out what to do in a certain situation," he says with a laugh. Harford resorted to economic principles when he proposed to his beloved. "It's something that a lot of men go through," he recalls. "The timing is crucial. You've been dating this girl for a while, you like her and you think she is the one. You could always propose next week or next year but you've got to do it some time."

Apparently popping the question is not that different from purchasing shares.

"There's an equivalent in financial markets called having an option," says Harford. "You buy them at a certain price and then their value can either go up or down. In a volatile situation, it tends to be best to wait even if things look good. You should just keep postponing it because you're learning more all the time.

"If, on the other hand, the window of opportunity is shrinking then you should buy. So I thought about the situation with my wife. It's not a volatile relationship and we've always been happy so there's no option value. But if you're happy, you're always going to be happy so you should just go for it. So I proposed to her and we've been married 6 years and have two kids."

Along with the likes of The Tipping Point author Malcolm Gladwell and Freakonomics' Steven Levitt and Stephen Dubner, Harford has been praised for "making economics sexy". But he is reluctant to accept such an accolade. "That's like getting sex advice from Mr Spock from Star Trek. It's just a weird way of looking at the world."

Gladwell has become a cult phenomenon with bestselling books Blink and Outliers, which expounded on a diverse range of subjects from the premium months of the year for top athletes to be born in to why pilots from certain cultures are more prone to crash planes. Levitt and Dubner recently enjoyed similar success with Superfreakonomics, which tackled everything from global warming to the effectiveness of seatbelts and the fluctuating price of prostitution.

"There's almost a theory of everything," says Harford of Gladwell. "Economics is an entirely appropriate discipline for studying things like relationships, military engagement or racial discrimination."

Harford owes much to the pioneering work of Nobel Prize-winning Chicago economist Gary Becker.

"He applied rational economic theories to divorce, racism and education," says Harford. "I try to apply economic ways of thinking to office politics, realpolitiks and the environment. Becker once said he originally wanted to study sociology but it was too hard, so he studied economics instead. It's a flippant remark but there's a lot of truth in that. The world we're trying to understand is incredibly complicated and we only ever understand it by simplifying it."

Harford also quotes Joel Waldfogel, who suggested in a 1994 that the recipients of Christmas gifts would only consider paying a portion of what a particular item was actually worth. "He asked people what they got for Christmas and how much would they be willing to spend on the present, what did it actually cost and what the gap is in value," says Harford.

"He found that the typical $50 Christmas present was valued at about $35, which is a loss of 20 per cent. Gift cards are also often sold at a loss on internet auction sites or people don't use them at all. In a country the size of New Zealand, that adds up to a loss of about $500 million."

At a risk of sounding like Ebenezer Scrooge, what does Harford recommend we do?

"The more you spend, the higher the risk. If I buy socks for $3 and you don't like them then that's just $3 down the drain, but if I buy a computer for $2000 that's a lot of dead weight if it's the wrong one.

"You end up realising that you should give smaller gifts because they waste less. You should also think more about the emotional resonance, which is the kind of advice that a hippie or a priest might give, but it also comes from an economist."