freakonomics


 * Justin DeSandre

Mrs. Moeller

12/11/08 11:28pm

Freakonomics Review/Summary**

 People, being people, like to buy things. People, also being people, like to be informed about the things that they are buying. People do not like to feel like they are being duped by information that they are given about the things that they buy. However, for many of the statistics that you hear on televisions or read in the paper are often nothing more than lies to get you to contribute money to some unworthy cause. How do I know such things? If people would take the time to do simple math, often they would find that many of the statistics are impractical and could never happen. Or, if they had read //Freakonomics// by Steven Levitt and Stephen Dubner, people would start to question all the random statistics they might hear. They might also ponder such questions as what do schoolteachers and sumo wrestlers have in common? How is the Klu Klux Klan like a group of real estate agents? Why do drug dealers still live with their mothers? Where have all the criminals gone? And while these questions seem to have almost nothing to do with economics, other than the drug dealer who still lives with his mother, the authors use these oddly paired examples to examine some of the basic principles in economics. By using such strange tactics, the authors immediately catch the reader’s attention, leaving the reader amazed that he has just learned more about economics in a 204 page book than he has in the first three months spent with his economics teacher (no offense Ms. Moeller).  The authors’ first point in //Freakonomics// is to attempt to define and capture what exactly economics is and what it can do for the average person. In the introduction to the book, the authors outline their main questions (see above paragraph for questions) and give the reader some basic insight into what specific economics theories and themes the authors are hinting at. Also, the authors continually state the fact that there is no unifying theme to this book and therefore tell the reader to not attempt to discern one from the book. The authors say that “morality, it could be argued, represents the way that people would like the world to work – whereas economics represents how it actually works.” Too often, the authors say, people spend too much time “moral posturing” and if people would spend more time “taking honest assessments of the data, the result is often a new, surprising insight”. By stating this idea in their introduction, the authors have created the idea that the book is not about postulating the morality of a situation and attempting to deduce why it occurred, but rather they step back from the situation, look at the facts they have, and create an honest, and amazingly accurate, theory as to why the event occurred.  The authors first examine what is an incentive and how a small incentive can actually drastically change a situation. They give the example of a small day care center in Israel that has become tired of parents being late to pick up their children. Obviously such tardiness places extra stress on the workers and requires them to stay longer in order to take care of the children. Finally the daycare center has had enough. They decide to institute a three dollar fine per child per incident of parental tardiness. Expecting the amount of late parents to go down, the day care center in Israel was amazed when the amount of late parents exploded. They could not understand why. The authors liked this phenomenon to incentives. The authors say that “an incentive is simply a means of urging people to do more of a good thing and less of a bad thing”, with the good thing being picking up your child on time and the bad thing being picking up your child late. However, the three dollar charge was simply not enough to deter the parents from dropping off their children late. Rather, the parents justified leaving their children later because they were paying their “sin tax” with the small fine and just continued about their normal routine. The authors hypothesized that if the day care center had made the fine say $40, then the amount of late parents would decrease. However, if the day care center charged too much for being late, then the parents would take their children elsewhere. The authors use the day care center story as a segway into their topic of what schoolteachers and sumo wrestlers have in common. The authors are saying that schoolteachers and sumo wrestlers have the economic incentive to cheat in order to keep their jobs. In the case of the teachers, Chicago public schools suspected that their teachers were cheating. In order to curb down on this, they had an algorithm made up of very complex math to calculate and determine which teachers had cheated to pass their students. Why would the teachers do this? Certain schools required that teachers’ classes have a certain level of test scores. If the teachers didn’t have this happen, they would be fired. Therefore, the teachers were given the economic incentive to cheat in order to keep their jobs. All in all, only 13 teachers out of 500 were fired and the rest of the cheaters were given a stern warning. How does this compare to the sum wrestlers? In sumo wrestling, there is a large tournament. In this tournament there are several different classes of wrestler. The top class of wrestlers is treated much like professional athletes here in the US. In order for wrestlers to remain in the top class, which is composed of 64 total wrestlers, they must win 8 matches at the tournament. It was noticed that if a wrestler had a record of 7 wins and they were wrestling a wrestler with a total of 8 wins or more, the 7 win wrestler won most of the time. Why did this occur? Once again, the wrestlers were given a strong economic incentive to stay within the top class so they began to toss matches in return for favors from other wrestlers later. The authors make the point that when giving out incentives, they should be examined carefully for unintended consequences can happen and can turn a molehill into a mountain. The next section of the book covered information and the power that information holds. The authors tell a story about a man who infiltrated the KKK and eventually contributed to its downfall in the south. This man infiltrated deep into the heart of the KKK and learned many of its secret signs and passwords that allowed KKK members to speak to each other in public without other people realizing what was going on. He then passed these “ideas” on to the producers of the radio show //Superman// and helped come up with the idea that Superman should fight the KKK (in post WWII Superman had run out of villains to fight). Since kids listened to this radio show, they began to use the KKK code words and secret speech in their own lives, making the KKK secret info public without meaning to. With the fear of being discovered, the KKK soon disbanded and let go of its stranglehold over the south. The authors then told the story of how real-estate agents have no real drive to truly earn you the most money. Since real-estate agents have very specialized knowledge about the housing market and the nearby areas, most home-buyers and sellers are at the mercy of their agents to get them the “best deal”. However this may not be the case. More often then not, real-estate agents sell a house for less than it could be sold for because their margin of profit made off of commissions does not make it worth their time to put in extra time and effort to sell the house for more. So what do the KKK and real-estate agents have in common? They both have specialized knowledge that gives them power. If the public could obtain the knowledge, then the group would lose its power. Such is the case with the KKK. The third question asked is why do drug dealers still live with their moms? This question came about after a roundabout story about a man who attempted to poll people in the projects about how they felt about being poor. In the process, he was captured and held hostage by the gang. In the end, he eventually became friends with the gang’s leader who agreed to educate the man on how the gang worked. The gang made most of its money through drug deals. At the end of each month, the total money earned was piled together and then divvied off to whose portion was whose. It was noticed that the lowly dealers themselves were not being paid much more than the average McDonald’s employee while the head of the gang was getting the most money of all. Why did this happen? Because the gang strikingly resembled the modern business world. The lowly grunts at the bottom of the pyramid hardly make anything. Yet if the grunt managed to move up to an executive position, he would find himself making money off of every single grunt below him. Thus, the authors proved that the reason most drug dealers still live with their mom is because unless they run the business, they don’t get paid all that much. This then linked to the idea that it is much better to run a business than be stuck at the bottom, at the mercy of the executives above you. The final example I will elaborate on is where have all the criminals gone? The authors talk about the startlingly large crime rate that seemed to be swarming the US in the mid-80s. “Experts” were predicting a near doomsday experience for the average American because they thought that crime rate was going to be so bad. However, when the rate was at its peak, it started falling and falling and falling and finally fell some more until it was at a 40 year low. Why had this occurred? The so-called experts linked it to new police strategies, stricter gun control laws, and tougher punishment on criminals. The authors proved that the police strategies made zero effect on the crime rate, the restriction of guns merely increased the size of the black market gun sales, and the tougher punishment on criminals simply led to an overstuffing of prisons. The authors finally linked the drop in crime to its true source: the legalization of abortion. After //Roe v. Wade// was passed, women in lower classes who would have been unable to provide a quality home for a child began to have abortions. This unwanted child was then never born into a society that would have rejected it and therefore never became a criminal. With this happening millions of times across America in the 70s, it led to the eventual drop in crime rate because of the reduced number of criminals. Once again, the authors proved that just because something gets changed, such as gun control, it does not necessarily mean it caused a change in something else. Overall, I thought that //Freakonomics// provided great insight into the wornderful world of economics without boring me to a slow and deliberate death. After reading the book, I now look at things in a new light. I do not just merely accept the facts that are shoved in front of me everyday, but rather, I take the time to examine them, think them out, and question them when they are wrong. So the next time you see a car insurance ad that tells you a car wreck happens every 3 seconds, think twice. Do some math. There aren’t 630,072,000 car wrecks every year. Evidently, somebody needs to check their facts.