Book Reviews

The Tipping Point: How Little Things Can Make a Big Difference

Contents

William Poole, The Monetary Policy Model

Stuart G. Hoffman, Reflections of a Professional Life-Long Fed Watcher

Thomas F. Siems and Adam S. Ratner, Strengthening Globalization’s Invisible Hand: What Matters Most?

Jacob De Rooy, Pricing of Mutual Fund Services in Retirement Plans: Evidence from Open-End Equity Funds

Edward P. Lazear, Productivity and Wages

Lloyd B. Thomas and Danhua Wu, Expected Future Budget Deficits and the U.S. Yield Curve

Dave Andrea, Original Equipment Suppliers Association

Robert P. Parker, Energy Information Administration Provides Extensive Data on Petroleum Supply and Demand Conditions

Book Reviews

By Malcolm Gladwell. 2002. Boston: Back Bay Books. Pp. 304, $14.95, paperback. Also, three abridged compact discs through Time Warner Audio Books, narrated by the author.

This book is one of several recent publications that relate to economic behavior. (See the review of Freakonomics in the January 2006 issue of Business Economics, which dealt with the use of incentives to influence economic decisions. See also the review of The Wisdom of Crowds in this issue.)

The author, a writer for the New Yorker magazine is interested in discovering what will be the turning or tipping point that causes individuals to take action or change their opinions. Tipping points lead to behavior that gathers momentum like an epidemic. He talks about people who set trends that tip behavior in one direction or another. For example, Hush Puppies were not selling particularly well until one or two designers featured them, which led to a significant boom in sales. The tipping point may be a memorable phrase. For example: “Winston tastes good, like a cigarette should” caught on as a catch phrase, which vaulted Winston cigarettes into the fastest selling brand in the country.

The author also cites an example of turning a disaster into a marketing success. The Lexus automobile had to institute a major recall because of a defective part, which would have endangered their prized position as a quality leader. However, the company took the trouble of contacting every Lexus owner individually to apologize and direct them to the nearest dealer who would repair the defect at no charge. Instead of a loss of face, the company’s reputation for customer service and satisfaction was significantly enhanced.

A tipping point also occurs when someone who is widely believed advocates a certain course of action. Paul Revere’s ride has been immortalized because it aroused opposition to the English army advancing from Boston to Lexington. Revere was known for his strong anti-British sentiments and his message that the Red Coats were coming spread like wildfire. Although he made a similar ride, William Dawes has received just a footnote in the history books because his views were not as well known as Revere’s.

The book is available on compact discs pleasantly read by the author. Business economists who work with marketing their company’s products will get many useful suggestions from the book. Economists who are interested in factors that influence behavior and behavior patterns will also find the discussion stimulating and useful.

Review by Edmund A. Mennis, Investment Management Consultant, Palos Verdes Estates, California

Print Version of Book Reviews

The Wisdom of Crowds: Why the Many Are Smarter than the Few and How Collective Wisdom Shapes Business, Economies, Societies, and Nations

By James Surowiecki. 2004. New York, NY: Random House, Inc. Pp. 296, $24.95 hardcover, $27.50, $14.00 paperback. Also five abridged compact discs, narrated by Erik Singer.

In their early careers, many economists were exposed to the dangers of mass decisions by their reading of Charles Mackay’s 1932 classic Extraordinary Popular Delusions and the Madness of Crowds. Mackay’s book describes major speculative events, such as the Holland tulip bulb craze, the South Sea bubble, and the issuance of unsecured paper money. Exposure to Mackay’s book would certainly breed skepticism about the usefulness of mass judgments in decision-making.

In sharp contrast, Surowiecki argues that group judgments can be valuable guides in reaching business and investment decisions. Group decisions can be useful if the inputs are derived from people reasonably knowledgeable in the field and who arrive at their conclusions independently.

Surowiecki’s illustrations to prove his points make interesting reading. For example, students asked to judge the number of beans in a jar came up with individual amounts that were widely different, but the average of their individual decisions was amazingly accurate.

Another example describes the problem of locating a naval submarine that lost contact with its home base and disappeared in the ocean depths. However, a group of people familiar with the submarine and its probable course at the time of its disappearance, made independent, individual judgments as to the probable location of the submarine on the ocean floor. Although most of the estimates were wide of the mark, the average of the estimates was remarkably close to the final location.

The author’s primary message is that the average of independent, wellinformed judgments on a particular topic can be more useful than the conclusions of one individual, however qualified he or she may be. The implications for market research are obvious, but the author also argues that corporate decisions could be improved by putting together the diverse views of a group of knowledgeable people in the company. This observation suggests an additional value to NABE surveys of economic policy and also NABE summaries of members’ forecasts.

The book is available in both hard and soft cover, and in addition, can be obtained in an authorapproved abridged version on 5 CDs pleasantly read by Erik Singer with an introduction by the author.

These audio discs are particularly helpful to people who are auditory learners rather than visual learners. While the idea of learning by listening may not be favored by many people, it is surprising how much can be learned and retained by focusing on listening, either while driving or spending leisure time with the record player. In any event, the book advocates the positive value of collective judgments rather than reliance on one person however well informed he or she may be.

Review by Edmund A. Mennis, Investment Management Consultant, Palos Verdes Estates, California