Outsmarting the crowds at the Shanghai airport

As many of you, my students, know, I spent the weekend in Sichuan Province previewing a China Alive trip for next year's freshman and sophomores. While I waited to board my plane on Thursday night, after a day of teaching economics, I found myself reading a fascinating book called The Wisdom of Crowds by James Surowiecki.



Well, the thesis of this book is that groups of diverse individuals tend to make better decisions and solve complex problems more skillfully than the smartest individual in the group could have done on his or her own. Interesting hypothesis, right? In fact, the basic theory here is one we've recently employed in our Econ classes through collaborative activities such as Welker's Wikinomics Page, where 36 AP students are supposed to work together to create something better than any one of you could have created on your own! Three weeks into this experiment in group wisdom and I think I can say we've at least to some extent supported Surowiecki's hypothesis!



Surowiecki introduces his thesis with a story set in a county fair somewhere in rural England, not unlike a 4-H fair you may have heard of if you grew up in the Midwest like myself. At this particular fair a farmer decided to offer a prize to the fairgoer who could most accurately guess the weight of a healthy bull he had put on display. Over 800 individuals placed their estimates, writing them on a slip of paper and depositing their guesses into a jar. At the end of the day, the guesses were collected, the bull was weighed, and the closest individual missed by only about 10 pounds, not bad considering the bull weighed in at 785 pounds! What's most interesting, however, is that when all of the 800 guesses were added up and averaged (the sum of the guessed weights divided by the total number of guesses) the result was a mere 1.4 pounds off of the bull's actual weight: 786.4 pounds.



Now, this could be a fluke, a random feat of pure luck or freakish happenstance... but Suroweicki only points to this as one illustration of a phenomenon that he believes holds true in countless realms of society. He goes on to point to the corporate structure, the stock market, sports betting, TV game shows and several other arenas where "group think" outperforms the smartest or most experienced "experts" in various fields.



You're probably wondering what this has to do with me sitting in the Shanghai airport last Thursday evening, right? Well, there I was reading this book when I notice a stir in the crowd of people around me. Before I know it everyone is jumping out of their seats and rushing towards the gate, and I find myself doing the same! What has become of me? Why am I joining this throng of Chinese travelers in a mad dash towards a narrow gap that obviously cannot fit more than one person through at a time? Is this kind of behavior rational? Does the crowd know something that I, as an individual, don't? Is the behavior of the crowd somehow wiser than the behavior of any individual within that crowd? These questions ran through my head as I jockeyed for position in the rapidly expanding queue.



Apparently, there is a shared belief among travelers in China that being among the first to board an airplane is desirable, and therefore boarding later is undesirable. I myself hate sitting on airplanes, therefore the rational thing for me to do would be to sit in the boarding lounge for as long as possible and try to be the last one to board the plane, thereby minimizing the amount of time I am forced to sit in an uncomfortable airplane seat.



But no, there I was, shoving my way towards a single lane among 200 Chinese travelers, all vying for a superior position in the chaotic proto-queue. As I continue reading The Wisdom of Crowds, I will try to identify what it is that makes humans sometimes behave irrationally in situations where the crowd decides that a particular decision is the right decision. In the case of the boarding of planes in China, the crowd seems to have decided that boarding first is best. The next time I'm about to get on a plane, I'm going to challenge myself and see if I can overcome the persuasion of the crowd, remain in the relatively spacious boarding lounge until that final call has been made; only then will I act in an individually rational manner and board the plane at my leisure. Or, am I really missing something here? Is there a rational outcome that results when individuals follow the group and act on their cue? What about you? Do you board planes when the crowd decides it's appropriate to do so? Or do you know something the crowd doesn't? Are you wiser than the crowd, or is the crowd wiser than you?



Comments welcome!

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Market Failure? Or Policy Failure? Throwing fuel on the Ethanol fire...

Ethanol's Growing List of Enemies

Here's an interesting article on the backlash against the US government's overzealous promotion of corn-based ethanol as a fuel alternative to foreign oil. This article presents a perfect application of economic theories as learned in AP and IB economics. Government subsidies to ethanol refiners is shifting out the individual ethanol firms' Supply curves and as a result the market Supply curve for ethanol outward. In order to produce all this new fuel, the demand for ethanol's main ingredient (corn) is shifting out as well, leading to higher corn prices. So what, you say? Well, turns out corn is an important ingredient in almost everything Americans eat, not just the tasty yellow corn on the cob, but thousands of other food products, including MEAT! Yes, our meat is made out of corn, who would have thought! (Of course, this is because cows and chickens and pigs EAT corn themselves.)

So, applying what you've learned about supply and demand, you should be picturing in your head thousands of meat and other food producers' individual supply curves shifting inward, as the resource cost (corn) goes up! How does this affect us, the consumers? Well, what happens to the price of all those food products that rely on corn when their supply curves shift in? Ah ha, now you see the big picture.

We want cleaner air, less glacial ice melt, stable sea levels, and energy independence... all good things, right? And the US government seems to have decided that ethanol is the solution... so what's the problem? Well, for one, the government has placed high tariffs on ethanol made from sugar. Why? Think about it... where is sugar grown? Or better yet, where is sugar NOT grown? (think of all those voters across the Great Plains states... are they in their fields hacking down sugar cane? I don't think so). So, now we see maybe this ethanol program is about more than just clean air, stable sea levels, and so on... could it be about politics too? Why, as the article says, are all the main presidential candidates in support of corn-based ethanol subsidies? Hmm... can anyone spell "Iowa Primary"?

Politics aside, this article also makes interesting connections to our recent units on Market Failure. Could it be that the true social cost of ethanol is not being realized in the prices paid by consumers? What externalities may result from the production of this so-called "clean" source of energy?

Here's a couple of key quotes that relate to our studies in AP and IB economics that I found interesting:

"The government thinks it can pick a winner, but they should allow consumers to pick their own."

"The government should stay out of energy markets and let the best fuels win."

"Why are we supporting ethanol with a mandate, but not wind and solar?"

In my view, these are some interesting points rooted in basic economic theory. Perhaps rather than lavishing the corn-based ethanol industry with billions in subsidies, the US government should focus more on internalizing the external costs of the oil industry... whether through taxation, tradeable permits, or other methods we learned about in class. If, after all, the goal is (as politicians claim) to clean up the environment, then we should start by correcting one market failure (overconsumption of dirty fuels), before attempting to tackle another (underconsumption of clean fuels). Then let the market decide which clean fuels it prefers... and leave politics OUT of it!

Students, please contribute your comments... this is right up your alley as AP and IB students!

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