Freakonomics
by Steven D Levitt and Stephen J Dubner
Freakonomics was a widely successful publication that uses historical events, anecdotes and economic concepts to encourage the reader to think in a more critical fashion. Exploring concepts such as incentives, information asymmetry, and correlation and causation, Levitt uses data in a subversive way to arrive at surprising and insightful conclusions. Its huge success has now spawned a blog, a sequel book and a documentary adaptation.
Summary
Levitt explains, ‘“Morality, it could be argued, represents the way that people would like the world to work, whereas economics represents how it actually does work,” and in this vain seeks to explore various social phenomenon. In Chapter 1, ("What do schoolteachers and sumo wrestlers have in common?”) Levitt outlines three key incentives:
Moral - Maintaining a good conscience and doing the right thing
Economic - The gain or loss of time or money
Social - Our reputation and how we are perceived by others.
He uses the case study of a childcare centre to explore how these various incentives interact to determine peoples decisions. The day-care wanted the parents to pick up their children on time, so they introduced a $3 fine. Financially, it seems logical that the number of late pick-ups should reduce. They have an economic incentive to pick their children up on time. However, the number of late pick-ups increased. This is because, a $3 penalty seems insignificant and almost ‘buys off’ the guilt parents may have had before. They no longer have a moral incentive to arrive on time. If they can accomplish what is more convenient for them while paying the appropriate penalty, albeit a small one, then this seems more logical. Levitt explains that as we respond to incentives, after considering them, if we get more benefit for less, we are more incentivised to do the wrong thing, or, ‘cheat,’ as was with the case of schoolteachers in Chicago or sumo wrestling scandals. In the case of the teachers, for example, if grades were low, the school risked being shut down, and if grades were high, the teachers had the chance of a promotion. With the risk of being caught seemingly negligible, they took advantage of the high stakes and low risk by cheating to increase the scores of pupils.
In his next chapter, Levitt explores the concept of information asymmetry. He uses the example of real estate agents to show how information can be abused for their own professional benefit while taking advantage of the common man. Real estate agents know the true worth of the house, but may present this information in a light that rewards their professional pursuits. As we are not as knowledgeable, we rely on them, blindly, to guide us. For example, they may advertise the house to be more valuable to the buyer to increase their commission. This is the idea that experts are incentivised to abuse information that they know more about than the average person. This information can also be manipulated, as was with the case of the Ku Klux Klan. The KKK’s terrorist power came from secrecy, not knowing what information they knew and what they planned to do with it. Information that once exposed to the world would lose the advantage the group would have from holding it. By uncovering what the KKK really knew about - and what they didn’t - made them seem vulnerable and changed the dynamic with the nation. Levitt accredits this phenomenon to the massive fall of the Ku Klux Klan. Information truly is power.
Levitt continues in a similar vein throughout the book using enlightening pieces of information and explaining various ideas in an light-hearted way. He goes on to challenge conventional wisdom about drug dealing, the difference between causation and correlation and even how to be, ‘the perfect parent.’
My Opinion
Freakonomics is a fun, exciting, engaging and eye-opening book. Levitt and Dubner combine to ‘explore the hidden side of economics,’ by asking seemingly bizarre questions. They draw the reader in with comical chapter headings such as, "What do schoolteachers and sumo wrestlers have in common?” Levitt uses data and statistics in creative ways to urge the reader to think unconventionally, to see the underlying implications of human behaviour and arrive at the ultimate punchline; we can easily reach new and demystifying conclusions on various topics, it is simply about asking the right questions and knowing where to look. The book puts you in the mind of Levitt, operating as an economic detective to find hidden clues. It pushes your critical thinking skills while piquing your interest.
A common criticism of Freakonomics, is that the book often strays into the works of sociology, which can be misguiding for those who wish to read the book with the intention of learning more about economics. However, I believe that the main purpose of the book was to provide an introduction to what Levitt believes is crucial to understanding economics – critical thinking. Economics, like sociology, is a social science and so may share some similarities. Furthermore, economics may be explained through the use of mathematical models and data, which Levitt references. But Freakonomics suggests that understanding human behaviour is as much as part of economics as these models. The data can be misleading if looked at from a purely empirical standpoint, and thus it is crucial to consider other factors and viewpoints, especially human tendencies and behaviours. This line of study aligns itself more closely to behavioural economics, which seeks to factor in a psychological understanding of human behaviour to explain certain economic decisions. Thus, although the book may use the assistance of sociology, criminology and psychology it still very much seeks to explore economics as much as quantitative models and evidences.
Another criticism of Freakonomics is that the book delves into topics such as how legalized abortion is a factor to a reduction in crime in the 1990s and other claims to a similar effect. While this seems outlandish, it is the essence of the book. In order to make the book entertaining, Levitt and Dubner had to explore thought-provoking questions. Although Levitt and Dubner stick to factual comments without political or social bias, they tread upon sensitive themes which may be viewed as controversial. Hence, to explain and justify these claims may require more evidence than has been provided. Each chapter asks a stimulating question that can easily be a paper or even a book of its own. Therefore, to condense it into a simple and digestible format may mean risking credibility if the entire thought process cannot be laid out.
Ultimately, however, Freakonomics teaches us to think differently and perceptively about the world around us. Presented in a thoroughly entertaining way, it makes the book appealing to a large range of people and is overall a great introduction into economics and critical thinking.
