Freakonomics: A Rogue Economist Explores the Hidden Side of Everything
From BookJive
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| Author: | Steven D. Levitt, Stephen J. Dubner |
| Publisher: | William Morrow; Rev and Expand, Roughcut edition |
| Published: | |
| Pages: | 336 |
| ISBN-10: | 61234001 |
| Category: | Array |
[edit] Introduction: The hidden side of everything
Abortion and Crime
A huge crime wave hit the United States in the 1990's and many experts were conservatively forecasting the end of the world, including President Clinton. James Alan Fox, who was commissioned to report on the situation to the Attorney General, predicted optimistically that crime would rise 15% over the next decade; pessimistically he predicted it would more than double.
In spite of everyone's predictions, crime suddenly began to drop and by the year 2000, crime was down to the lowest point it had been in 30 years. The drop was ubiquitous and consistent year after year. Many experts attributed the dramatic decline to such factors as gun control, innovative policing strategies, and the booming 90's economy.
The real cause had been set in motion more than 20 years earlier--January, 22, 1973--with the supreme court ruling on Roe vs. Wade that legalized abortion. What does Roe vs. Wade have to do with a dramatic drop in crime? Numerous studies concluded that children born into adverse circumstances are much more probable to become criminals than others. Poor, unmarried, teenage mothers, who before Roe vs Wade couldn't afford an illegal abortion, were now legally and safely aborting their high risk, would-be criminal children. Years later when these children would have been in their prime, crime suddenly and dramatically decreased.
Real Estate Agents
Real estate agents use their informational advantage to get you the best price when buying or selling a house. Right? Well, real estate agents are human and humans respond to incentives.
Two examples:
A study of auto mechanics in California found that the mechanics often passed over small repairs when inspecting cars for emissions and safety. For mechanics, leniency is rewarded with repeat business. This is an example of an expert's incentive working to your advantage.
A study found that Obstetricians in areas with declining birth rates are much more likely to perform C-sections than those in areas with increasing birth rates. C-sections are more expensive. This is an example of and expert who's incentive works against you.
Data from 100,000 homes on the market in suburban Chicago was collected and analyzed. 3,000 of these homes were owned by real estate agents.
A 6 percent commission is typical when selling a home—3 percent goes to the buyer's agent, 3 percent goes to the seller's agent (of which each gives 50 percent to his or her agency). If the agent were to sell a $300,000 house, his or her personal commission would be around $4,500.
Now, say an agent were to keep your house on the market a little longer and sell the same home for $310,000. This would amount to an extra $9,400 in your pocket, but only an extra $150 for the agent. A lot of extra work for a small return. The Chicago real estate data, however, found that agents selling their own homes kept their homes on the market for an average of 10 days longer and sold their homes for an extra 3 percent.
Money's Influence On Political Outcomes
There is a common held belief that money buys elections -- Arnold Schwarzenegger, Michael Bloomberg. Election data shows that the candidate that shells out the most money during an election ususally wins...but does money get the votes or does the candidate with the greatest appeal get both the votes and the money? Front runners and incumbents raise a lot more money than underdogs.
Correlation or Causation: Cities with a lot of murders also have a lot of police officers. Someone might say all the extra police cause the increased murders. This is only a correlation as well as a classic fallacy.
To find out if money impacts the polls, data can be taken by measuring a candidate against himself. If two candidates run against each other in different elections and spend different amounts of money each time, we are able to pull some interesting results. The amount of money spent by the candidate hardly matters. A winning cadidate can spend only half as much money and lose only 1 percent of the vote. A losing candidate can double his spending and gain only 1 percent.
The book is based on a few fundamental ideas:
- Incentives are the cornerstone of modern life
- Conventional Wisdom is often wrong
- Dramatic effects have distant, even subtle, causes
- "Experts"--from criminologists to real-estate agents--use their information to serve their own agenda
- Knowing what to measure and how to measure it makes a complicated world much less complicated
[edit] CHAPTER 1: What Do Schoolteachers and Sumo Wrestlers Have in Common?
Daycare Study
Children are supposed to be picked up by 4:00 PM although parents are often late. A pair of economists offered a simple solution: fine the parents for being late. A 20-week long study was conducted in 10 daycare centers in Israel. For the first 4 weeks, no fine was invoked and there were, on average, 8 late pickups per daycare per week. At the beginning of the fifth week, fining policy was announced which stated that any parent more than ten minutes late would be charged a fine of $3.00 per child, per incident.
After the fine was enacted, the number of late pickups increased to 20 per week. Why didn't the late pickup incentive work for the daycare centers? There are different types of incentives: economic, social, and moral. Different situations respond best to different types of incentives or different proportions of a blend of the three types of incentives. The problem with the daycare incentive was that the $3.00 fine was too low. The $3.00 incentive--an economic incentive--superceded the moral incentive--not being late and inconveniencing someone else.
What happened on April 15, 1987? Seven million American children disappeared. Instead of just listing children by name only, tax payers were now required to provide a social security number for each child. The economic incentive of claiming non-existant children was superceded by the social incentive of not breaking the law and going to jail for tax fraud.
High Stakes Testing was mandated as part of the No Child Left Behind law passed by President Bush in 2002. A teacher who's students test poorly can be passed up for promotion, a school who tests poorly can have federal funds withheld. On the other hand, there are positive incentives. For example, some schools in California were offered up to $20,000 for teachers who produced big test-score gains. Teacher cheating is rarely caught and rarely punished. How can a teacher cheat on the test? They can give more time. They can alter the student's answer sheets or, as one teacher did, actually write the answers to the test on the board.
The Chicago School District made available to a group of economists test scores from the years1993 to 2000. In order to identify cheating teachers, the first thing the economists checked the incidences of habitually poor-performing students answered the latter, harder test questions in a consistant string while missing earlier, less difficult questions. Another red flag was found in comparing class scores from previous years. If a poor-performing class achieved low scores in one year, high scores in the following year, and low scores in the year after that, it could be concluded that the teachers had cheated on the test. An analysis of all the data found that around 5 percent of the classes had cheating teachers. This is a very conservative estimate because it only detects the most egregious types of cheating.
The CEO of the Chicago School District, Arnie Duncan, asked the economists to help him confirm that the teachers were truly cheating and then do something about it. They decided to readminister the standard exam and have it administered by Chicago School District employees rather than the class teacher. They chose the classrooms they thought cheated and they also chose the classrooms that the algorythm showed as having the best teachers (as a control group). The good-teacher classrooms scores remained the same while the "cheating-teacher scores fell by more than one grade level.”
Cheating to lose vs. cheating to win
In Sumo Wrestling, any wrestler in the top 40 makes at least $140,000 a year, those in the top few can bring in millions a year, and a wrestler ranked 70th earns about $15,000 a year according to data from tournaments dating from January 1989 to January 2000.
Life isn't so good outside the elite 66. They are forced to care for those above them in the rankings. In tournaments, if you have a winning record of 8 of 15 (in a sumo tournament) you advance in the rankings. If you have a losing record (7 of 15) you will move down in the rankings and possibly be kicked out of the elite 66). Which matches are most likely to be rigged? When a 7-and-7 wrestler faces an 8-and-6 wrestler. In these matches, the 8-and-6 wrestler has far less to loose than the 7-and-7 wrestler has to gain because he has already secured his rank advancement while the other is fighting to secure his advancement. The data from all previous bouts between these two wrestlers in past tournaments shows that the 7-and-7 wrestler should win 48.7 percent of the time. His actual winning percentage is 79.6 percent. So the wrestler that was on the bubble ended up winning almost 8 times out of 10 while he was predicted by previous matches against his opponent to win only 5 out of 10 times.
The data further shows that in the opponent's next matches (when neither wrestler is on the bubble) that the the 7-and-7 wrestler wins only 40 percent of the time, suggesting a quid pro quo agreement--you let me win this time and I'll let you win the next. Further, during matches where allegations of cheating have come forth, the 7-and-7 player will win 50 percent of the time instead of the typical 80 percent.
Paul Feldman started bringing bagles into work every Friday. In 1984, he quit his job and started to sell bagles. He delivered bagles and a cash basket to company dining rooms around the area. He was eventually delivering 8,400 bagles to140 companies every week. Feldman delivered the bagles early in the morning, along with a cash basket which he would pick up later that day. Feldman kept rigorus data and from his data he could measure general levels on honesty. Feldman experienced a slow decline in payment, to a level of 87 percent until September 11, 2001. Right after 9/11, the payment percentage jumped up 2 percent and has stayed there ever since.
[edit] CHAPTER 2: How Is the Ku Klux Klan Like a Group of Real-Estate Agents?
Information is one of the most powerful social and economic tools. Levett and Dubner relate how economic and political events were shaped as a result of "information asymmetry." In one of their examples, the authors show how an infiltrator into the Ku Klux Klan, Stetson Kennedy, documented the group's secret rituals and codes and disseminated them to journalists, who in turn discreetly channeled the information into the public awareness through popular radio programs. In time, the group lost its influence and appeal as its erstwhile, clandestine information became public. In another case, the authors analyze the common strategies used by real-estate agents and compares them to the strategies used when they are selling their own houses. The authors found that when agents are negotiating for the sale of their own houses, they do not always work for the best interest of the clients. Other asymmetries in information which the authors cited as resulting to misconceptions were exhibited by game show participants, i.e., The Weakest Link, and online dating patrons.
What this chapter really wants to tell the readers is that businesses, organizations, and individuals can manipulate information and use it to gain advantage (again, incentives) over others.
[edit] CHAPTER 3: Why Do Drug Dealers Still Live with Their Moms?
Like the questions the author posed in the preceding two chapters, Levitt and Dubner tried to answer this intriguing question by analyzing the economics of small-time drug dealers in the streets of Chicago.
The main source of the financial data Levitt used in the analysis of the dealers’ living conditions was the records kept by Sudhir Venkatesh, a researcher of many housing projects in inner Chicago. Levitt performed an extensive analysis of the data and was able to deduce that most lower-level drug-dealers earn less than the minimum wage! He drew a parallelism between the food chain McDonald's and the drug-dealing syndicate. According to him, as in McDonald's top executives and managers, the only ones who profit mightily from drugs were usually the upper level leaders and operators.
So, why do drug-dealers still live with their moms? Simple, because they are broke!
[edit] CHAPTER 4: Where Have All the Criminals Gone?
This chapter tries to explain the mysterious decline in crime rate in the late 1990s. This, by far, this has been the most controversial conclusion made by Levitt and Dubner. According to them, the major contributing factor to this phenomenon was the legalization of abortion. The authors argue that innovative policing strategies, capital punishment, improved economy, and stricter gun control law didn't do much to deter the wave of violent crimes in the US. They back up their claims by statistical data from various states which show a correlation between abortion and the decrease in crime rate. They contend that the trend in the decline of crime rate occurs early in states where abortion was legalized earlier than the other states. The other correlation the authors find to support their argument is that the states with higher abortion rates in the 1970s had the most prominent decline in crime rates in late 1990s.
The authors cite unfavorable family environment, tough neighborhoods, and poor living conditions as the factors that most influence the perpetrators of crime and contend that women who exercise their right to choose abortion tend to make good decisions, as shown by the drop in crime rate. However, the authors did not make a stand on the issue of abortion. As Levitt states, "morality represents the way people would like the world to work, whereas economics represents how it actually should work."
[edit] CHAPTER 5: What Makes a Perfect Parent?
This chapter answers not only the question of "what makes a perfect parent?" but also raises the question, "which is most dangerous for a child, a backyard swimming pool or playing with a gun?"
When Levitt lost his infant son to meningitis years prior to the publication of his book, he sought guidance and counseling from some support groups for bereaved parents. In the process, he observed that there is a remarkable number of parents who lost their child in the backyard swimming pool. This led him to further investigate the phenomenon. What he found out provides a startling revelation, a child is more likely to die in a backyard swimming pool than playing with a gun.
In his succeeding research topics, Levitt explores other aspects of parenting and what constitutes parenting techniques that produce positive results. Again, through his unconventional observation and unemotional and non-judgmental analysis, he was able to posit another controversial hypothesis: the socioeconomic status of parents, as well as their educational attainment, are more of the major contributing factors to children getting above average results in standardized tests than what parents actually do in rearing their children as suggested by experts, like reading stories. Levitt concludes this chapter by bringing up another sensational observation: adopted children are more likely to get higher scores in standardized tests than their non-adopted siblings.
This chapter substantiates what Levitt and Dubner had already demonstrated in Chapter 3 of the book -- that conventional wisdom is not always right.
[edit] CHAPTER 6: Perfect Parenting, Part II; or Would a Roshanda by Any Other Name Smell as Sweet?
The main theme of this chapter circles around the prevailing African-American culture in the United States. The authors’ observation, backed up by statistical data from California registry of births, is that individuals with distinctively black-sounding names tend to achieve lower attainment with regard to education, social class, and economic status compared to non-black-sounding names. According to Levitt, their study revealed that the name "Wayne" tends to have dark connotations and is frequently associated with criminal behavior.
As in the previous chapters, Levitt and Dubner try to answer one or more controversial questions in their own unconventional way. In this chapter, they try to shed light on the socio-political question, "does the prevailing black culture in America reflect the economic gap between white and black people or has it caused the gap to widen?"
To end the chapter on a less-radical note, the authors track and try to give explanation to how previously obscure names become popular among white Americans.
All in all, this book succeeds in sending its message across to all people, in any social and economic class, that if we only know how to ask the right questions, "the modern world, despite a surfeit of obfuscation, complication, and downright deceit, is not impenetrable, is not unknowable... All it takes is a new way of looking."
