Freakonomics- Steven D. Levitt & Stephen J. Dubner
I first read Freakonomics when I was still in secondary school, and I think it may have been the catalyst of the revival of my interest in books. It challenges conventional wisdom and other assumptions we have about our world, in a fun, light-hearted and leisurely manner.
“I just don’t know very much about the field of economics. I’m not good at math, I don’t know a lot of econometrics, and I also don’t know how to do theory. If you ask me about whether the stock market’s going to go up or down, if you ask me whether the economy’s going to grow or shrink, if you ask me whether deflation’s good or bad, if you ask me about taxes- I mean, it would be total fakery if I said I knew anything about any of those things.”
Levitt is being humble and self-deprecating- but the truth is, nobody else really knows whether the stock market’s going to go up or down, or whether deflation’s good or bad. It’s far too complex for any individual to wrap his head around. He’s embodying a sorely lacking Socractic wisdom here- acknowledging his own limitations. Nassim Taleb would approve!
Economics is a science with excellent tools for gaining answers but a serious shortage of interesting questions.
The fundamental idea that seems to be expressed in Freakonomics is that incentives matter, that people respond to incentives, though almost always not in the way that we intend or expect them to.
Together, Levitt and Dubner describe how crime rose in the 90’s, attributed to the “superpredator” teenage criminal- and how everyone predicted that it was going to get a lot worse. Crime fell dramatically instead, and explanations attributed ranged from the economy, gun control laws and better policing. Levitt and Dubner argue that it was legalized abortion that did it- that the people most likely to have abortions were those most likely to otherwise raise children in an adverse environment- children who’re apparently more likely to become criminals. So criminals simply stopped being born.
Do real estate agents really want the best for you? Surgeons don’t operate on themselves, and we don’t have records of mechanics
Real estate agents will hold out for the best offer when selling their own homes, but will push you to accept the first decent offer that comes along- the additional money they get on commission from a better offer on your house isn’t enough incentive to get them to stick around longer- they prefer faster turnovers, selling more houses.
Is it money that wins votes, or is it a candidate’s appeal that wins both money and votes? There’s actually a way to test this out- by holding the candidates constant, and changing the spending. This actually happens all the time- candidate A runs against candidate B in consecutive elections. And it turns out that a winning candidate can cut his spending by half and lose only 1% of the vote.
Incentives are the cornerstone of modern life. Understanding them, or ferreting them out- is the key to solving just about any riddle, from violent crime to sports cheating to online dating.
Conventional wisdom is often wrong.
Dramatic effects often have distant, even subtle, causes. (This is interesting to explore in parallel with Malcolm Gladwell’s The Tipping Point or Seth Godin’s Unleashing The Ideavirus.)
“Experts”- from criminologists to real-estate agents- use their informationa advantage to serve their own agenda.
Knowing what to measure and how to measure it makes a complicated world much less so.
It is worth remembering that Adam Smith, the founder of classical economics, was first and foremost a philosopher. He strove to be a moralist, and in doing so, became an economist.
At a daycare center, some parents would be late in picking up their children at closing time. This was troublesome and wasteful for the teachers. A $3 fine per incident was added, to a monthly bill of about $380. The number of late pickups doubled- people used to try not to be late out of social obligation, but now that there was a financial cost to it, being late no longer made parents feel guilty. When a small financial stipend is given to blood donors, they tend to donate blood less- a noble act of charity becomes a painful way to earn a few dollars. What would happen if the late-coming fine were much higher, or if blood donors were paid a lot more? In the first case- latecoming would drop, but so would enrollment- you’d generate lots of ill-will. In the second- blood donations would skyrocket, but people would try to exploit it- perhaps stealing blood at knifepoint, use fake IDs to circumvent donation limits. Whatever the incentive, whatever the situation, dishonest people will try to gain an advantage by whatever means necessary.
White collar crime presents no obvious victim. Smaller communities have less crime than larger ones.
Why don’t we commit a lot more crime? Every one of us regularly passes up opportunities to maim, steal and defraud. Jail is a strong disincentive, of course (described here as economic penalties- losing your job, your home, your freedom). But when it comes to crime, people respond to moral and social incentives the most. The idea of being labelled as a criminal is worse than actually going to jail. If you could go to jail without anybody ever knowing, you’d probably be more likely to commit a crime.