Can You Outsmart an Economist? 100+ Puzzles to Train Your Brain INTRODUCTION This is a different sort of puzzle book. If you solve the puzzles in this book --- or even if you just cheat and read the solutions! --- you'll learn a lot about economics, a lot about how to interpret statistics, and maybe a bit about law, math, science, and philosophy. As you might expect if you're familiar with some of those subjects, not every puzzle has a clear unambiguous answer. But that doesn't mean that all answers are equally good, and the "solutions" will at least aim to sort out the best from the worst. There is, though, one way this book is just like every other puzzle book: It's meant to be fun. To that end, I've scattered in a few puzzles that I think are especially fun, even when they have no deep lessons to teach. Here and there, I've also indulged in some (occasionally rambling) commentary that I hope will make the lessons of the puzzles either clearer, or more fun to think about, or (ideally) both. If this book has a moral it is this: Think beyond the obvious. What seems obvious is often wrong. That's both why puzzles are fun and why economics is important. Economics is, first and foremost, a collection of intellectual tools for seeing beyond the obvious. When 46% of male applicants, but only 30% of equally qualified female applicants, are accepted to grad school, what can we infer? When a strong pig and a weak pig compete for food, what should we expect? If you impose a price ceiling on wheat, what will happen to the price of bread? Why do appliance manufacturers prohibit retailers from discounting their merchandise? Can a series of perfectly rational choices lead to inevitable bankruptcy? In each case, the obvious answer is wrong, and economists know why. When you've finished reading this book, so will you. Economists are not the only explorers in the land beyond the obvious. Philosophers, psychologists, legal scholars, scientists and statisticians often map the same territory, each with a different intellectual toolkit. It would be foolish to ignore their hard-won discoveries. Nineteenth century Arctic explorers routinely died of such foolishness when, ignoring the hard-won and freely offered wisdom of the natives, they refused to wear animal skins and therefore froze to death in their British-Navy-issued woolen clothes. The British Navy, you see, trusted only ideas which had originated in Britain. I'd prefer not to make the same mistake, even in a less deadly context. So while most of the puzzles in this book are designed to showcase the power of economics, I am delighted to share some of the limelight with worthy insights regardless of their provenance. Anyway, even if I wanted to, it would be quite impossible to fence economics off from all other disciplines, because disciplines overlap. A handful of numbers can either reveal a deep and important truth or mislead us into accepting a dangerous falsehood. How do you tell the difference? Both economists and statisticians worry about that question. Is the answer part of economics or statistics? It's part of both. And when lawyers have to settle cases based on a handful of possibly deceptive facts, they face essentially the same set of issues. Are they practicing law or practicing statistics or practicing economics? They're practicing all three. That's not the only way economics overlaps with the law. Much of economics is about facing up to trade-offs. Is it better to have a bigger fire department or a cut in taxes? Is it better to have more cars or less pollution? Is it better to have a safer investment portfolio or one with more upside potential? Legal scholars face exactly the same sort of trade-offs when they ask questions like: Is it better to risk more false convictions (say by loosening the rules of evidence) or to risk more false acquittals (by tightening those rules)? When they debate that trade-off, are they being lawyers or are they being economists? They're being both. Much of economics is about what it means to be rational, and the extent to which human behavior is rational, and why anyone should care. In other words: How do people make decisions, how could they make better decisions, and would better decisions improve their lives? These are also central questions in philosophy. Indeed, there's a whole subject called decision theory which draws on ideas from both economics and philosophy --- and statistics and mathematics, for that matter. Are decision theorists economists or are they philosophers? Sometimes they're one, sometimes they're the other, and often they're both. And on and on. The analysis of strategic behavior lies at the core of both economics and political science. Finding the right way to think about uncertainty is key to both economics and the branch of mathematics called probability theory (though philosophers and statisticians weigh in heavily here also). It's quite simply impossible to just "do economics" without simultaneously doing a whole lot of other things. Now and then, when you're reading this book, you might be tempted to ask "But what has this got to do with economics?". Please resist that temptation! If what you're reading has anything to do with interpreting data, or with strategic behavior, or with decision making, or with calculating probabilities, or with facing trade-offs, then it not only has something to do with economics; it is economics. If what you're reading has anything to do with thinking beyond the obvious, then economics has something to contribute. This is not a textbook. A textbook on economics would have chapters on consumer behavior, profit maximization, supply and demand, market structures, and cost-benefit analysis. There are plenty of good textbooks out there, but this book is different. It's organized according to the sorts of question that people (including economists) ask naturally, and the habits of thinking that economists (and others) have found useful. The book starts off (after some largely-just-for-fun warmup puzzles) with chapters on Inferences, Predictions and Explanations --- corresponding rougly to questions of the form "What's happening?", "What's likely to happen?" and "Why?". These are the sorts of questions we all ask every day, and there are no hard-and-fast dividing lines among them. Does smoking cause cancer? I might be able to draw an inference from data showing that smokers have higher cancer rates --- at least if I can rule out other possibilities, such as a single gene that causes both cancer and a propensity to smoke. Based on that inference, I can make a prediction that people who smoke more today are more likely to get cancer tomorrow. And I can look for an explanation for the observed correlation, which might involve cell damage. The lines between the inference, the prediction and the explanation are a little blurry. So please don't take the chapter headings too seriously; many of these puzzles, with a slight twist or two, could have fit just as well in one chapter as another. Within each of these chapters, I've felt free to draw on many different branches of economics and schools of thought--- calling on whatever helps to illuminate the issue at hand. Economists aspire to understand, predict and explain all human behavior. We believe that much of that behavior is strategic, which just means that people try to anticipate how others will respond to their behavior and plan accordingly. Sometimes, thinking one obvious step ahead is all it takes to succeed. More often, thinking one step ahead is an excellent recipe for losing out to those who think two or three less obvious steps ahead --- until they, in turn, have lost out to those who think all the way to the even less obvious endpoint. You can see how that plays out in the chapter on Strategy. We also believe that much human behavior is rational, which just means that it serves some purpose. Other people's apparently irrational choices --- in politics, in business and in their private lives --- are sometimes genuinely irrational. More often, those choices serve a perfectly rational but non-obvious purpose. Discovering that purpose can make you a more compassionate person, a more effective competitor, and a wiser voter. In the other direction, when you make your own meticulously rational choices, you always risk exploitation at the hands of those who can spot the non-obvious inconsistencies in your plan. You can test your own vulnerability by taking the quiz in the chapter titled How Rational Are You?. The remaining chapters offer a potpourri of techniques and topics that economists (and others!) find useful --- calculating probabilities, reasoning in reverse, the best ways to make decisions, distinguishing right from wrong (particularly when lives are at stake), and more. Near the end, I've included two chapters --- The Coinflipper's Dilemma and Albert and the Dinosaurs --- that invite the reader to contemplate some simple problems that look very much like economics, but where the usual tools of economics break down. The final chapter returns to some of the areas where economists are most sure of themselves, like money, trade and finance. Feel free to read these in any order. A few hark back to ideas from earlier chapters, but most stand alone. Dip in to whatever looks inviting. And above all, have fun.

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