[Book Review] Freakonomics

[Freakonomics: A Rogue Economist Explains the Hidden Side to Everything] – by Stephen J. Dubner and Steven Levitt was a great book. 

It was different. And I liked it.

Freakonomics makes you look at the world in a different way.  The book explores the real reasons for the 1990s crime drop, information asymmetry, real estate agents, correlation vs. causation, and, most importantly, in the introduction, which discusses the fundamental principles of incentives. From then on, each chapter focuses on answering, or more so addressing an unusual question.

What I particularly liked about it was that although the majority of the time you are reading the book, (or in this case, I was listening to it on Audible), you feel like there is no structure. But in the end, you realize that like most things, everything in the world is connected in a weird yet magical way. It’s a weird thought. It allowed the book to flow because you felt like with every chapter you were learning about something new and unique–as if the book was just a “fun facts” book—but overall, you realize that the core concepts were all driven by the same thing: incentives.

The basic foundation of economics is incentives. If morality is how the world ideally should be with respect to an individual’s perspective, economics is how the world really is. 

So this is my summary of each chapter

[Note. This book was published in 2005]

Chapter 1: What do schoolteachers and sumo wrestlers have in common?

Why don’t more people commit crimes to make money? It’s generally a quick and easy way for economic gains, and often not that hard to get away without being caught. But then there is your moral conscious stopping you, as well as the social pressure of having to lie about your career choice, or potentially breaking valuable relationships. Not to mention that if you were to be caught, the economic pain—getting jailed, losing privileges, your house—might be much worse than the incentive for quick unstable economic gains. You’d rather just get a stable job—you’d probably make more money that way too. And thus, the balance of 3 incentives are given:

  • economic
  • social
  • moral

Every decision is driven by these three core incentives. (Although, I believe there are 5 incentives. Personal and Logical are included in my post of “using incentives to choose a career you like.”)

One case study addresses economic incentives by adding a “late fee” of $3 for parents who picked up their children late from daycare.

What do you think the result was? Would parents pick up their children on time now, after there was an economic incentive to doing so?

The answer was an astounding NO. In fact, late pickups went UP.

The $3 tax was simply too little, not enough of an economic incentive. However, what paying the tax DID do was eliminate any social or moral incentive for the parents to pick up their children early. Parents didn’t feel bad anymore coming late, because they felt that it was justified now after paying the measly $3 to relieve the moral and social pressure.

So, what do schoolteachers and sumo wrestlers have in common?

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Photo by Jonas Jacobsson on Unsplash

In the Chicago public schooling system, high incentives were in place for certain teachers to cheat. When high-stakes testing was added, the cheating subsequently went up. Schools that had low test scores risked being shut down and teachers with low test scores can be passed over for promotions or even potentially fired. The economic incentive was there. The moral incentive was skewed (some teachers believed that this was morally justified to keep the school running), and the social incentive wouldn’t matter if they didn’t get caught. But they did because economists understood their incentives.

luiz-hanfilaque-342635-unsplash.jpgLikewise, sumo wrestlers have an elaborate incentive scheme in place. Rankings determine everything for a sumo wrestler, from how much money they make, to fame, to how much food and rest they get. In a tournament, 15 bouts are fought. Contestants with 8 or more wins (higher than 50%) will see their rankings rise, and those with fewer than 8 will drop. Thus, a wrestler with an 8-6 record, who already will see a rise in their ranking, has high incentive to throw a game to a contestant with a 7-7 record. A bribe or social incentive is often put in place in these situations. The results were again astoundingly evident. Across several tournaments over several years and analysis of a large sample of rounds, contestants with a 7-7 record, a 50% win record in the tournament, won 80% of their matches against 8-6 opponents in these scenarios.

“Something worth having is something worth cheating for”

Chapter 2: How is the Ku Klux Klan like a group of real estate agents?

Both groups are “successful” based on their foundation of information.

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Photo by Cosmic Timetraveler on Unsplash

Why do we hire real estate agents? If your incentive to hiring an agent is to get the best possible price, it may actually not be in your favor in most cases. Homes sold through real estate agents are not sold at a higher price compared to houses sold by independent individuals. Real estate agents may have more information on housing prices, but that doesn’t necessarily mean their incentives are aligned perfectly for them to gain the best offer, because many other factors are influenced into the sale of any home—time being a large factor. What real estate agents offer is convenience and expertise to actually sell the home in the first place. They have the coveted information and knowledge needed to sell our homes at the good prices, and they have the information to a network, to connections, and to advertising secrets, as well as the time to do any necessary research and phone calls that individuals have no particular desire to do. Real estate agents rely on their information, much like the Ku Klux Klan.

Stetson Kennedy, a writer intent on ending bigotry, went undercover in the Ku Klux Klan after their revitalization after the end of World War II. While the KKK’s influence was rising, it was still primarily a fear rhetoric rather than their concrete actions. (In fact, during their peak times, the number of lynchings were actually not increased at all, which was supposedly one of their main practices). Kennedy, after learning many of their extensive secrets, leaked it out to radio shows and children in a “mockery” way. Promptly, membership drastically dropped. Information was leaked, and their secrets were no longer in place.

Information is a huge driver for the success of many professions. Why did stock brokers make so much money before the internet became so readily available for individuals to do their own research? Why do companies hire market consultants to give advice and research on complicated industries? Why is an education worth $60,000 a year? (Actually, it probably isn’t, but I probably don’t have the guts to drop out!)

Chapter 3: Why do drug dealers still live with their moms? A study on “Conventional Wisdom”

This chapter focuses on a man named Venkatesh, who studied a cocaine gang in Chicago, run by a man named J.T.

Drug dealers don’t make nearly as much money as conventional wisdom teaches us.  Yes, the top dogs do make good money. Head of branches, people like J.T., makes $100,000 per year, tax-free, while the board of directors can make $500,000 per year. But the majority of the drug dealers are foot soldiers.

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Photo by Daniel Olah on Unsplash

Being a foot soldier is dangerous. There is a 1 in 4 chance of being killed, not to mention being arrested or severely injured. Their wages were $3.30 an hour, lower than minimum wage. (book released in 2005). This dispels the conventional wisdom that all drug dealers are making a lot of money and explains while they still live with their moms.

The moral incentive might be lacking as well to be a drug dealer, and the social incentive is definitely a struggle—such a profession is not one you’d prefer to bring up on the dinner table. So why do people do it? Economic incentive.

Although the measly wage is offered to foot soldiers, to rise to the top of the pyramid and make 6 figures, everyone starts off at the bottom. The potential to climb the ladder is often incentive enough for people who take on the job, willing to risk their lives and leave other jobs to climb the ranks. In a dire situation, this is entirely an economic decision, J.T. helped explain.

Chapter 4: “Where Have All the Criminals Gone?

 

This chapter is quite interesting. It discusses the real crime rate drop in the 1990’s. No, it was not due to more creative policing efforts (which was thought to be the case), nor was it due to a strong economy.

When Nicolae Ceausescu became the communist dictator of Romania, he made abortion illegal. The aim was to boost Romania’s population in order to strengthen the nation. Prior to that point, abortion rates were incredibly high, with four abortions for every child born.

Within one year of the abortion ban, the Romanian birth rate doubled. These children born after the abortion ban would lead especially miserable lives, being less successful in school and in the workforce on average than children born before them. They were also likely to become criminals. The abortion ban continued until Ceausescu lost his grip on Romania. In 1989, he was captured and ironically killed by protestors, many of whom were of youth and grew up in miserable conditions, and many of whom would not have been born had Ceausescu not instated the abortion ban.

Contrastingly, the legalization of abortion in America in the 1960’s was the primary reason for a drop in crime. In the 90’s, when many of the would-be born children to struggling mothers would be in their 20-30’s, a likely age for youth to commit crimes, those people simply were not alive to commit the crimes.

niu-niu-600592-unsplash.jpgA strong economy, gun laws, and creative policing efforts, although boosted confidence in America, had no correlation whatsoever to the crime rate drop. Though, it definitely would have been bad publicity if American newspaper headlines read “Crime rate drops due to 1.6 million children being aborted every year in 1980!”

Chapter 5:  What makes a perfect parent?

This chapter discusses factors of parent success.

A woman named Judith Rich Harris argued in her 1998 book called The Nurture Assumption that parents mattered less, and peers had a much larger effect on a child’s personality.

A study in Chicago school system revealed that in a student’s academic achievement, school choice barely mattered at all. Students who won the lottery and went to a “better” school did no better than equivalent students who lost the lottery and stayed at their neighborhood school.

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Photo by David Straight on Unsplash

Some factors that do matter to a child’s “success”

  • parents’ education level at birth
  • the socioeconomic status that child is born into
  • age of parent at birth (mid-thirties is best)
  • the language that is spoken at home (English in NA)
  • involvement in the PTA (parent-teacher association)
  • the child’s birthweight

Only two of these 6 factors can be directly influenced by a parent after birth (speaking English at home, and being involved in the PTA). The other 4 are factors are scenarios that the child is born into, and thus are determined not by what the parents do. The child’s birthweight can’t be changed no matter how good of a parent you are, nor can a parent suddenly acquire a Ph.D. degree or add a few years to their age moments before birth. Socioeconomic status is a bit tricky, as families situations can change.

Parents who take their children to museums, or read books to them, or puts them in the best schools have no evident effect. It seems that what is more important is not what the parents do, but is rather who the parents are as role models and their natural influence to the child.

Chapter 6: Do Names Matter?

The final chapter of this book discusses whether or not the name parents give their child matters. Levitt gives an anecdote about a New York City man named Robert Lane who gave his son the name “Winner,” and then named his next son “Loser.” Contrary to what his name suggests, Loser Lane succeeded in life, promptly rising the ranks in the NYC police department, where his colleagues called him “Lou”. Winner Lane, despite what his name suggests, has been arrested nearly three dozen times (it is not discussed if arrests were ever done by his brother, which would be quite ironic)

Levitt tells another story of a woman who accidentally named her daughter “Temptress”, meaning to name her Tempestt—the girl eventually went on to do things like bring numerous men into the house while her mother was at work.

Levitt then presents the conundrum: does the name given to a child affect his life, or are the parents’ lives reflected in his name?

Another case study showed that black names posed a disadvantage. Masses of identical resumes, only differing in either distinctly white or black names, were sent to employers. However, the “whitest” names clearly gleaned more interviews, despite having the same resume and being read by the same person.

Finally, the data proved that people with the “blackest” names had a clear correlation with being less “successful.” On average, the data showed that having a black name correlated with lower income, lower education, lower job rankings. But does that mean having a black named cause these situations?

If you’ve ever taken any statistics course, the answer is a clear “No”

CORRELATION DOES NOT EQUAL CAUSATION!

De Correlaciones. Analítica de Datos (II) | Analítica web

The only reason the data showed that people with black names had less success has nothing to do with their names, but rather is because black families in America often grow up in disadvantaged scenarios. Parents are younger at birth, have less formal education, and many black parents are single parents. Not to mention the fact that people with black names are given fewer interview opportunities due to passive discrimination, despite having the same credentials, it’s no wonder that the data shows such a correlation.

 

Having more books in the home correlates with higher children test scores, but the real cause is the fact that the child actually reads them, not because the physical presence of the books somehow makes children smarter. Just as having a black name doesn’t mean cause you to be less successful—you actually have to grow up in a disadvantaged situation often common for black families and face the discrimination that comes with having a black name.


Thanks for reading this far.

If you enjoyed this review/summary, I highly recommend you check out the book.

[Freakonomics: A Rogue Economics Explains the Hidden Side to Everything]

Or, Try it on Audible! It’s a great listen.

There is also a sequel which I finished this week. (I’ll do a review on later!)

Superfreakonomics: Global Cooling, Patriotic Prostitutes, and Why Suicide Bombers Should Buy Life Insurance

 

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