Last Updated on 2 years by Piyush Jain
Freakonomics: A Rogue Economist Explores the Hidden Side of Everything by Steven D. Levitt and Stephen J. Dubner
Steven D Levitt, a young economist from the University of Chicago, earned a John Bates Clark medal and was getting famous for giving the reason for the reasons why things happened. Stephen J Dubner researched on the book about the psychology of money. Stephen is the author and a journalist from the New York Times Magazine. As they meet, their frequency match and they decide to work together to write this book called “Freakonomics.”
The authors state that the reason for something happening may not be as evident as it appears if we attribute the new effects to the same, we may be wrong. The causality of the same may be due to some other factors. The book discusses the points in detail with data and statistics spanning over the years. The authors eliminate the myth that conventional wisdom is enough.
To start with, the book claims not to have a single theme of thought in the book. It would give various examples and situations to explain the facts observed.
Chapter 1: What Do School Teachers and Sumo Wrestlers Have In Common?
The authors state that there are 3 types of incentives. Economic, social, and moral. Whenever an incentive scheme is devices, it tries to include all the 3 factors.
Further, the authors give 3 examples for explaining the situations. In the 1st case, he elaborates that the flawed incentive scheme may even increase the occurrence of aberrations.
In the first example, a pre-school in Haifa charges a $3 penalty for every instance of delay in picking up the kid. Did this motivate the parents to avoid late pickup? No. In turn, it increased the aberration, and now people paid and took it for granted that they can pick up late for the small fee of 3 USD. In case this amount would have been more, then it would have deterred people from this aberration.
At one point in time, certain areas of the country (US), used moral policing to deter prostitution. They would display the names or photos of the people on the web site, which would be a social shame.
School teachers in California were offered $25000 per year as a bonus if their results were excellent. The bonus was a considerable incentive to cheat. They now want their result to be good, so apart from teaching well, they would also help students in exams. Not only in preparation, but in their exam sheets too. They would alter the answers to gain more marks. The school authorities detected a pattern of this alteration. On finding that the teachers had changed the records for their advantage, they were fired, reprimanded, or dismantled the involved school with replacing positions by transfers.
Sumo wrestlers, a profession of pride in Japan, also carried a lot of perks when one is ranked high in competitions. There was a tacit understanding within a few sumos to maintain their ranking to keep availing the perks. Once if I win, next time, I will let you win, so that we retain our ranks, and get royal benefits like other down ranking sumos serving us, and a difference in the pay by around ten times.
So if out of 15 matches, I have a score of 9-5, while the competitor has a score of 7-7. If I lose the game and have a score of 9-6, while he gets a score of 8-7, we both maintain our high ranking. If the other sumo fails and is on 7-8, then he looses his elite status. In this, the mutual consideration for each other keeps the close-knit sumos in a tacit understanding.
The authors, giving the example of Paul Feldman, state the statistics of people behaving in case of the situation they are not being watched over. Paul delivers bagels in offices and leaves the payment box besides the bagels so that one can pick up the bagels and pay at wish. Here one could decide to pay more or even not pay, as no one questions you. He observes various patterns, like people in the tense office, tend to cheat more. People in the more prominent offices (higher number of people) will pay regularly. People at higher hierarchy levels may manage not to pay sometimes. Weather, political situations in the country, season, etc. affect the collections. The study was conducted over several years and had an exciting outcome.
Paul further explains this was narrating the story of “The ring of Gyges,” where morality depends on person to person. It may happen that some, if allowed to be invisible, may do many wrong acts, while some may remain good and keep his moral values highs. Check out the book to get the answer to how many people will stay moral.
Chapter 2: How is the Ku Klux Klan like a group of real-estate agents?
Ku Klux Klan group rose in the US in the early 1860s. It started with small pranks and later gained the form of a movement and a gang. Later on, it became a movement against the blacks, and to generate revenue, they would take criminal contract jobs from the businessmen. They now started extorting businesses. They also targeted new immigrants from Europe and Black Americans. It was such an organized crime that they even had insurance schemes for the clan members.
Ku Klux was very aggressive, and Stetson Kennedy, one of the clansmen, did not like this. He further went ahead to somehow to dismantle the group by using various tactics. He made this Ku Klux Klan as the villain on the radio show. While Superman was a superhero against Hitler, Mussolini, and Hirohito, after the 2nd world war, the society was in a search for a new villain. The clan was a perfect candidate. He also wrote the memoir “The Klan Unmasked,” exposing the dark activities and deeds of the clan.
Slowly the clan lost its charm, and information decimation was better, so the clan lost its advantage of information disparity. The same situation as later the real-estate brokers had, and which they eventually failed due to the internet. Louis D Brandeis (Who also happens to be one of the champions of data privacy world over) rightly said about information, “Sunlight is said to be the best of disinfectants.”
Further, the author narrates that be it insurance sale, high price sale, real estate, or anything, convert information into fear and reap the benefits. Sell a $50k car instead of $25k, for the security features, hurry up the sale of the house to a broker, as the prices may fall further, get yourself insured, as you do not know what may happen to you next moment.
Another example explains why people do what they do. It depends on the time, and who is in front of them. With what situation they will be in more advantage, they will take that decision. The game weakest link analyzed the behavior and decisions of the individuals. It did not matter how good/bad you are. If you are of advantage to others, you stay, else they will vote against you. If there are white contestants, they will vote out the black or Hispanic first, no matter how good they are. Later they will vote out the strongest early if that person may pose a threat to their position.
In a similar example, the author narrates how does the dating apps work. What do the males and females look at each other? The politicians create false propaganda while their agenda and motives are different than stated.
Chapter 3: Why do drug dealers still live their moms?
Sudhir Venkatesh stayed for six years between the black in Chicago, studying their behavior business and culture for his Ph.D. He dared to walk in between them, ask questions, and talk to them. The community appreciated his courage as an ordinary citizen may even fear for his life entering those narrow stingy lanes.
He understood, why did the youth of that community endanger his life with this dark business, with the petty earnings, violence around, and no future visible. Sudhir understood that it was just 1 or 2 people who were earning a handsome taxfree amount, and lived in glamor, while the entrant, risked their lives, earned even less that than the daily labor wages per hour, risked being caught by the police, still they continued. Why? Glamor, idealizing their chief, attachment to their community attributed to it. Sudhir was surprised that the chief would even take care of the family in case the earning member of the family died during the drug dealing business.
The gang members doubted on Sudhir that he was some spy, either from other gang or police, but he managed to maintain trust with them and stayed till long there until police caught JT (the gang leader) and sentenced to prison.
Answer to the question “Why do drug dealers still live their moms?”, is that the earnings of the drug dealers are so low that they need the support of each other, and thus prefer to live with their moms.
Chapter 4: Where have all the criminals gone?
The author narrates on why and how the crime rose in Romania. The dictator Nicolae Ceauşescu banned abortion in 1966. He not only banned it but forced the female citizens to have kids or else pay tax. He did not grow the economy, instead filled his coffers. When the new population born was in distress, this gave rise to the crime rate. He faced the brunt as the people overthrew him and got him executed in front of a firing squad.
But why did the crime decrease in the US? Were the better-policing techniques or the rise in the economy, the reason for it? Well, NO. Earlier, the sentence was softer; thus, the fear of committing the crime was less. Now, the administration decides that commit a crime, and a harsh punishment will follow. The prison population rose three times, and thus the crime rate decreased. However, this was a very costly affair, as it cost around $25k per year to keep a prisoner.
The author states the rise in the economy only decreased by 2% of the unemployment rate, but crime decreased by 40%. Now, this was not clear that the 10% assumed rate (high value) of unemployment fell to 9.98% or 8%. If the new unemployment rate is 8% now, then the people see that there is a difference, and thus the crime rate should fall. The author disagrees with this fact.
Does the increase in the rate of death sentence prosecution decrease the crime? He states that a chance of dying for a criminal outside the prison is 7% while inside is 2%. So it is better inside the prison than being outside. So this not attribute to a fall in crime.
Was the rise in the number of police officers attributed to a fall in crime? Though the author says that the crime rate did decrease in New York, but there was a rise of 45% in the number of NYPD police officers. When NYPD taking care of even small crimes like stone-throwing and nipped it in the bud, it decreased the crime rate.
Was the gun control a reason for reducing crime? No. Switzerland has the highest number of guns per person; still, the crime rate is meager. If they impose gun control, it will give rise to the healthy black market for trading guns. A crime committed using guns was just 1 out of 10000 crimes.
Was the legalized abortion a reason for a decrease in crime? In 1900, abortion was made illegal, and this gave rise to crime, as the kids born forcefully and without the willingness of the mother made the raising of kids a problematic affair. Abortion was legalized in a few states in the US in 1970, and the other states followed in 1973, and one could see the effect after many years.
This gives rise to another question. How should parenting be done? What attributes or steps make sure that the kids grow to be successful and happy people. The next chapter discusses this.
Chapter 5: What makes a Perfect Parent?
Before I start and give the analysis of the book further, read Peter Sandman’s statement. He is a risk management consultant at Princeton, New Jersey. “When the hazard is high, but the outrage is low, then people underreact. In case the hazard is low, while the outrage is high, then people overreact.”—the outrage factor, which will help you decide what to do.
Would you allow your kid to go out to his/her friend’s house, who has a gun with them or a swimming pool? Read the book to understand the concept. I don’t want you to lose insight.
How does the insurance companies sell some schemes? They focus on the outrage and not the hazard. For example, they sell policies that cover damage by the terrorist attack on a reasonable (high) price, while checking out that what is the possibility of that happening.
What constitutes good parenting? Good school, good parent’s background, good company, good family income, books, Mother’s age at childbirth, surrounding culture? The authors choose Chicago school area data to analyze the effect of all these points.
Good school: No. It does not matter. The kid will do good if the kid and the parents are motivated well enough. There was a race for admission to the good schools. They introduced the lottery system for admission. Did the lottery losers miss out on anything? Statistically, it showed that the motivation of the kid mattered the most. It is crucial to have an excellent school to have safe surroundings, entertainment, and friends, but how the kid does in the long run, only motivation mattered in this case.
Good parent’s background: It mattered how educated the parents are. If the parents are less educated, then they may not be able to guide the kids enough to take the right steps to achieve higher goals. Though it does not limit what the kid may achieve in life, the parameter of difficulty arises in the case of less-educated parents. Parent’s education also influences the motivation level of the kid. An educated parent may motivate the kid to study better.
Good company: Means how good/bad is the company of the kid. This attribute would influence the personality of the kid. It might shape his future too, but not as much as the above factors.
Books: It was observed that kids who had a lot of books at home would do better in the future. Does this mean that if all the kids get a truckload of books, then they all would do good? This point is an indicator of how motivated is the family towards education. They would procure books out of their interest; then, it makes sense. Illinois Governor Rod Blagojevich once ordered that each kid would get a free book every month from birth till they enter kindergarten. Distributing free books imposed a burden of $26 million on the exchequer, but did this affect the expected outcome? No. This is a natural indicator of motivation. Just material benefits cannot push ahead of the cause.
Mother’s age at Birth: This determines how mature is the mother at the birth of the kid. Generally, willing mothers are more motivated to bring up the kids well. Mothers in the late 20s and early 30s are relatively mature and ready to have kids after thinking through the future. The kids of such mothers are expected to de better.
Surroundings culture: It was observed that the black kids, even if they wanted to be sober, mannered, and speaking right English, were not accepted by their fellow black students. They were labeled as “trying to act white.” This forced the black kids to distort their language and deliberately do poorly in exams.
Many other factors influence parenting decisions, and there are exceptions too. Despite all the right elements, someone may turn out to be wrong. Bruce Sacerdote, in his paper titled “The Nature and Nurture of Economic Outcomes,” addresses the nature-nature debate by taking the long-term quantitative look at the effects of parenting. The outcome is that it is the attitude and motivation of the parents and kids that decide how kids will do in the time to come.
Chapter 6: Perfect Parenting, Part II; or; Would a Roshanda by any other name smell as sweet?
“Name” is a big thing in a person’s life. The world recognizes the person through it and stereotypes him using it. Would keeping a fancy name have an economic, social, psychological, or any other effect? The author narrates a detailed study done on names based on race (whites/blacks), economic levels (rich/poor) by the trend in decades. The survey states that the names turn around in circles. The names that the affluent use in around one decade are used by the poor in the next, and vice-versa. A self-explanatory great name is no assurance of doing well in life. The author gives an example of 2 brothers, Winner Lane, and Loser Lane. Contrary to expectations, Winner Lane started his crime career early and landed in prison. Again, contrary to expectations, Loser Lane began his brilliant career, gets a scholarship in the colleges, and further proudly joins NYPD as his mother expects.
Did you see every naming someone their daughter, Madonna, or name of any celebrity? Generally, people avoid calling their kids the name of very successful people or ones in their near relatives.
Ultimately the author concludes that the name isn’t likely to make a shard of difference. But the parents can at least feel better knowing that, from the very outset, they tried their best.
4 thoughts on “Book Review – Freakonomics”
The book review by Piyush Jain gives a nice and quick, yet sufficiently detailed, glimpse of the contents of the book. The book review is so lucidly written that I could not put it aside without reading it completely. From the review it is clear that the book delves on several interesting aspects, supported by clear examples. I look forward to reading the complete book.
Thanks Amit. It is a great encouragement to me.
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