Freakonomics - Summary + Highlights
Freakonomics, a collaborative book by Stephen J. Dubner and Steven Levitt, gives insight into the world of incentives and peoples’ behavior in response to them. In their writing, the authors creatively provide everyday, relatable examples to offer a deeper vision into how decision-making and perception is influenced by external factors. This post outlines the six chapters of the book and summarizes the basic concepts Dubner and Levitt have to offer.
Chapter 1: What do Schoolteachers and Sumo Wrestlers have in common?
“Economics is, at root, the study of incentives: how people get what they want, or need, especially when other people want or need the same thing. Economists love incentives.”
The beginning of the book features the presentation of a hypothetical scenario in which the authors invite the reader to temporarily assume the role of a daycare manager. At this supposed daycare, the manager has a clearly-stated policy that requires parents to pick up their children by 4 pm. Nonetheless, many parents fail to abide by this policy. A few economists proposed the solution of imposing a fine for tardy parents. After all, if the parents have to pay for being late, then they would be extra cautious in coming to the daycare on time, right?
Contrary to this assumption, the frequency of late pick-ups increased to over double the average! It turns out, there are many different layers within the category of incentives.
There are 3 main types of incentives:
Economic incentives - those which people respond to in the marketplace
Social incentives - those which influence peoples’ actions due to fear of perception
Moral incentives - those which appeal to a person’s ethical framework
While incentives are implemented to persuade one towards or from doing a certain actions, they can oftentimes come with unintended negative consequences. To expound upon this idea, Dubner and Levitt present a few different examples from different regions and varying scales:
Through the No Child Left Behind law, standardized testing became the basis for which students could progress to the next grade level, teachers could receive higher salaries, and schools could gain greater budgets. As Levitt expected, cheating occurred. Teachers of the lowest-achieving classrooms were caught changing students’ answer sheets to the correct answers. When the teachers were fired the following year, cheating fell by 30%.
Sumo wrestlers in Japan are held high in regard, and in order to maintain this reputation, many have been caught manipulating their performance.
When Levitt interviewed Paul Feldman, a bagel business entrepreneur, he found that cheating and the income level of customers showed a directly proportional relationship.
Through these instances, the reader can gain a perspective into the complicated nature of incentives.
Chapter 2: How is the Ku Klux Klan like a group of Real-Estate Agents?
This next chapter delves deeper and speaks to the concept of information asymmetry.
Although the example of the Ku Klux Klan may be seen as dark to some readers, it is ultimately an effective historical instance to highlight the argument. Throughout the twentieth century, the KKK had experienced fluctuating degrees of popularity and success throughout the twentieth century before it eventually met its downfall. Stetson Kennedy—a writer and human rights activist—went undercover and joined the KKK in hope to expose their secrets and, in due course, contribute to its end. When he was able to feed these secrets to a radio show, Klan membership significantly declined. Kennedy’s understanding of the power of information is what allowed him to succeed in his purpose. Once the KKK’s power, which existed in the form of information, was exposed, they lost the advantage they had from holding it. The authors associate the same pattern observed in Kennedy’s situation to the new age’s internet. While the internet has more or less “balanced out” the concentration of information, there still exist some who make use of this information in different ways and hold an informational advantage.
The authors transition into looking more closely at the real-estate agent problem introduced at the beginning of the book. They speak to how real-estate agents use their informational advantage to induce fear in their clients so that, when stakes are portrayed as higher than they usually are, clients act more impulsively and do not spend too much time pondering over whether they should offer a higher bid to the seller. The real-estate agent may describe an old house as “well-maintained” because of the more positive connotation it holds. When wrapping up this example, the authors concede that it is not only experts and professionals who abuse information; we all selectively choose—whether it be intentional or subconscious—how we wish to showcase ourselves to others.
The end of the chapter considers the two different kinds of discrimination that economists propose: information-based discrimination, wherein people discriminate because they believe the other person is poorly-skilled, and taste-based discrimination, wherein people discriminate because they prefer not to interact with the other person. It is no secret that on dating sites, individuals portray themselves and their appearance more attractively than they perhaps are. Though, that is not the only way dating site-users lie; in settings, the majority of white people indicate that the race of their potential match does not matter, even though they still send over 90% of their queries to other white people. Needless to say, truth is often distorted.
Chapter 3: Why do Drug Dealers still live with their Moms?
“Conventional wisdom” is defined by economist John Kenneth Galbraith as information that reinforces a person’s own interests and well-being. In other words, while conventional wisdom may be comforting, it is not necessarily true. Despite knowing this, people somehow still have trouble questioning their conventional wisdom. Levitt takes a stab at one such conventional wisdom: that drug dealing is one of the most profitable jobs in America.
In 1989, Sudhir Venkatesh, a PhD student at the University of Chicago, was administering a survey throughout housing projects in Chicago when he came across Black Gangster Disciple Nation. As he got to know them, his interest in their operation deepened, and he spent nearly 6 years studying them. He later joined Steven Levitt, one of Freakonomics’ authors, and they both collaborated in a further study on the gang. They compared the organization of the gang to business like McDonalds. The gang Venkatesh had been living with was one of the hundreds of branches of the Black Gangster Disciple Nation, and the head of each branch reported to a board of directors and paid 20% of their revenues to this central leadership. Below the heads were other subordinate officers and rank-and-file members.
The two economics researchers checked the gang’s financial records and found that although the top bosses and branch heads earned a whopping $500,000 and $100,000 annual salary respectively, the officers earned only $700 per month, and the foot soldiers only $3.30 per hour (less than minimum wage!). The men at the top earn big time, but the majority of the dealers get nothing but crumbs. This, my friends, is why drug dealers still live with their moms.
So, why do the foot soldiers continue dealing with the risks and violence of the job if they know their treatment is unfair? Hope. Hope that they could move up ranks and make money like their managers do. Usually, these people already live below the poverty line and do not have the ability to move into other careers. It does not help that their branch heads intentionally kept wages low to “show who is boss.” Capitalism.
Levitt continues making odd comparisons and uses the similarities between crack cocaine and nylon stockings as his next food for thought. He speaks to how the invention of nylon stockings allowed the general public to enjoy what used to be only available to the upper classes - silk stockings. The invention of cocaine led to a similar result; the creators found a cheaper way of producing tiny rocks of smokable cocaine, crack.
Chapter 4: Where have all the Criminals gone?
Levitt posits that crime and abortion are related. How so? Before Nicolae Ceausescu became the communist dictator of Romania, abortion rates were high, as there were about 4 abortions for every 1 live birth. After Ceausescu assumed his role, he made abortion illegal with the intention of boosting Romania’s population and ultimately strengthening the nation as a whole. As anticipated, the birth rate doubles within a year of the ban being in effect. Though, the children after this ban were significantly more miserable, performed poorly in their careers compared to the children born before them, and were more likely to become criminals.
Levitt turned to newspapers in America to see if the same crime-abortion relation persisted in his nation, but not a single one of the eight most credible news sources accredited the drastic drop in crime rates in the ‘90s to Roe v. Wade. Most newspapers referenced changes, like increased imprisonment and the bursting of the “crack bubble,” to explain the effect on crime rates, but they were not influential enough to have single-handedly brought about such a drastic decrease. Though, when Levitt conducted his own study and gathered data on crime rates from states that legalized abortion and those that did not, he found that abortion rates and crime rates undoubtedly shared a strong inverse relationship.
Since reading about how imprisonment and the crack bubble led to the decreased crime rates is comforting and convenient to many, newspapers resorted to feeding into their audience’s comforts, even though they were not accurate.
Chapter 5: What makes a Perfect Parent?
How can someone best influence another to listen to them and follow their beliefs? Marketers and dictators would both agree that appealing to emotions is an effective way to go.
Parenting “experts” too know that their audience, parents who have another human’s life in their hands, have some fear and anxiety about the decisions they make for their children. So, they exploit their audience using this knowledge. Though, Levitt argues that parents are actually scared of the wrong things. They may not send their child to a friend’s house if they have a gun in their home, but they will send their child to a friend who has a swimming pool, even though the child is supposedly 100 times more likely to die in a swimming accident than they would in a house with a gun. Continuing on the theme of risks, Levitt explains how the risks that we have at least some control over are less intimidating than those that are completely out of our hands. For instance, there are more people who are afraid of flying in airplanes than there are of driving cars. Peter Sandeman, an expert on risk, uses the equation, risk = hazard + outrage, to describe the nature of risks.
Levitt returns back to pondering over the importance of parenting. Given the analysis conducted on the relationship between abortion and crime rates, we know that bad parenting has an effect on children, but does good parenting make all that much of a difference? The Nurture Assumption, a book by Judith Rich Harris, suggests that peers are much more influential a child’s personality compared to the parents. Levitt further looks into Early Child Longitudinal Study (ECLS) by the U.S. Department of Education, which measures the academic progress of over 20,000 students from grades K-5. After conducting regression analysis, the data revealed that although the test gap between black and white students disappears after controlling for variable factors like income and education level of parents, the gap still reappears two years later. The researchers correlate this result to school segregation. Levitt proposes that the factors that show some relationship with academic performance are parents’ education level, socioeconomic status, age, language spoken at home, involvement in PTA, child’s birthweight, whether the child was adopted, and the presence of many books at home. The factors that showed no relationship with academic performance are the makeup of the child’s family, whether they moved to a “better” neighborhood, mother’s profession, whether the child attended Head Start, whether the child is spanked, whether the child watches TV, and whether the parents read books.
Simply stated, the circumstances that children are born into, as opposed to the things that the parents specifically do, have a greater effect on the child.
Chapter 6: Perfect Parenting, Part II; or: Would Roshanda by Any Other Name Smell as Sweet?
What is in a name? Our identity? Does the name your parents gave you years and years ago really mean that much to who you are?
Levitt spends the last chapter of the book attempting to answer these questions. He begins with an anecdote about a man who named one of his sons “winner” and the other “loser.” Common assumption may point towards Winner flourishing in life and Loser suffering. However, it was actually Loser, nicknamed “Lou” by his colleagues, who experienced upward mobility, while Winner was arrested on nearly 3 dozen separate occasions. Another anecdote about a mother who accidentally named her daughter “Temptress” instead of “Tempestt” is briefly discussed.
Levitt introduces the fact that both these examples are from black households, so he continues the discussion by introducing a young black economist at Harvard whose academic specialty and focus is in black underachievement: Roland Fryer. Fryer wanted to know if the names given to black children cause the economic disparity between races in society or simply reflect it, so he examined naming data from California and observed that the significant divergence between black names and white names became present only in the 1970s supposedly because black parents who gave their children “white names” may have been penalized by neighbors in a predominantly black community for “acting too white.” However, black families that lived in other communities with neighbors of other races did not succumb to this influence by peers. That’s why the naming data reveals that people with a distinct “black name” usually do have a worse life outcome than people with a distinct “white name,” but this more so has to do with the fact that they are born into different circumstances and less with any psychological effect of the name. In another study wherein identical resumes with different names were sent out to employers, the “white names” always attracted more interest and landed more job interviews.
What is interesting is that the naming data from California revealed a pattern in how the popularity of a name changes over the years. New names typically start off at the high-income, educated end of the socioeconomic first, and then those names eventually catch on to the middle class and then to lower-income families. Levitt proposes that this is because parents like the sound of successful names.
He concludes by suggesting that while parents attempt to give their children meaningful names to point them in a certain direction, these names ultimately do not have a strong bearing on the child’s life.
Epilogue
Although there may not be one universal theme to the book, it’s important to recognize that they all relate in how they are dealing with decision-making.
It may also be worthwhile to think about two boys discussed in chapter 5:
Boy 1: black, grew up with an alcoholic father, overcame the odds against him, attended Harvard for economics
Boy 2: white, extremely privileged youth, also attended Harvard
Boy 1 was Roland G. Fryer.
Boy 2 was Ted Kaczynski AKA Unabomber.
Decision-making and behavior! Continue asking questions like the titles of the chapters.
