Freakonomics

Steven D. Levitt is a learned economist and academic. However, his professional

interests, as well as the often-jarring questions he asks, are more those of a bookie,
detective, filmmaker or treasure hunter. Indeed, Levitt professes little interest in
economics per se. Instead, he likes to solve fascinating riddles and paradoxes. With
the help of bestselling author Stephen J. Dubner, Levitt explores numerous offbeat,
sometimes zany topics in this bestselling book, including why it doesnt pay to attend
a better high school and why many drug dealers live with their
moms. getAbstract thinks you will find something to relish on every page of this eye-
opening book and recommends it highly, with this update: as summarized below, the
authors attributed the 1990s drop in the U.S. crime rate to the nations legalization of
abortion in the 1970s, positing that unwanted children are likelier to become
criminals. Writer Malcolm Gladwell later disproved this concept, contending that the
contraceptive pills advent in the 60s should have produced a similar result, but, one
generation later, crime increased. Levitt has since updated his contention, stating,
During that period, more abortions implied less crime. Whether that is still true today
is quite questionable.

In this summary, you will learn

How economics can uncover basic truths and shed light on innumerable disparate
topics;
What information asymmetries are and how they work; and
Why experts are interested in their own agendas above all else.

Take-Aways
You can resolve many of lifes complexities if you know how and what to measure.
Economics can provide sophisticated tools for this process.
Economic assessments can sort through mountains of data, isolate individual causes
behind events and determine patterns.
Economics illuminates disparate topics.
For example, vendor Paul Feldman incidentally isolated economic data on white-
collar crime by selling his bagels using the honor system.
Information asymmetry, where one party is privy to information that another does
not have, is an important economic factor in the balance of power.
Therefore, revealing the Ku Klux Klans secrets undermined the clandestine group.
Car salespeople, real estate agents and even doctors can abuse information
asymmetries to sell you goods and services you do not need.
Economic analysis of a drug gangs accounts reveals a hierarchy: leaders earn well,
but street dealers do not therefore, many of them still live with their moms.
If you understand the incentives that motivate people, you will see how the world
works.
 How to Ask an Economic Question and Get an Unusual Answer

Are you willing and prepared to move beyond accepted wisdom and ask intelligent
questions, to strip away the veneer of lifes assumptions and look beneath it? If so, you
can find the answers to seemingly baffling issues. Often, by asking the right questions
and digging for the answers, you can find what you want to know concealed in already
available data. Economics, the science of measurement, provides helpful tools you
can use to interpret the information around you and offers logical answers to complex
paradoxes. Its findings support a few basic propositions:

If morality represents how we would like the world to work, then economics
represents how it actually does work.

Incentives are the cornerstone of modern life Discover the motivation

behind specific human actions and you will find the answers to many of lifes riddles.
The conventional wisdom is often wrong The people who create such
wisdom often are not wise.
Dramatic effects often have distant, even subtle, causes Norma
McCorvey, the impoverished drug abuser who was the plaintiff in the Roe v.
Wade Supreme Court case that led to the U.S.s legalization of abortion in the 1970s,
had more impact on lowering the crime rate in the mid-90s than gun control or
enhanced police work. Crime fell two decades after the landmark ruling because legal
abortions meant fewer unwanted children were born, and unwanted children are at
greater risk of growing up to break the law.
Experts...use their informational advantage to serve their own agenda
But, if you do your research you can counter the experts and reduce their advantage.
Knowing what to measure and how to measure it makes a complicated
world much less so Economic assessments allow you to sort through mountains
of data, isolate individual causes behind events and determine patterns.

It is well and good to opine or theorize about a subject, as humankind is wont to do,
but when moral posturing is replaced by an honest assessment of data, the result is
often a new, surprising insight.

Bagels as an Honesty Metric

For many years, beginning in the 1960s, Paul Feldman worked as an analyst for the
U.S. government. As a supervisor, he always bought bagels and cream cheese for his
staff whenever his group secured new research contracts. People loved the bagels so
much that he began bringing them in every Friday. Soon, people from other
departments would come to Feldmans section and eat the bagels. Before long, he was
buying nearly 200 bagels weekly. To cover expenses, he put a cash basket next to the
bagels. Normally, his colleagues left enough money for 95% of his cost.
There is nothing like the sheer power of numbers to scrub away layers of confusion
and contradiction.
Sensing a good thing, Feldman quit his job in 1984 to sell bagels full-time in local office
parks. In the mornings, he would drop off bagels and cash boxes, and hed pick up his
earnings and any leftovers in the afternoons. Soon, he was selling 8,400 bagels weekly
to office workers at 140 companies. Feldman kept strict records of exactly how much
money he made and how many bagels he sold. Thus, he knew exactly how honest the
workers in the various offices were about paying for their bagels on the honor system.
Except for his bagels tallies, no really reliable data tracks white-collar crime.

The basic reality is that the risks that scare people and the risks that kill people are
very different. (Risk expert Peter Sandman)
Although Feldman made a 95% return supplying bagels to his co-workers, this rate
dropped when he began selling to strangers. He considered companies honest where
the employees paid for 90% of the bagels. Companies where staffers paid 80% to 90%
were annoying but tolerable. Feldman left notes at companies where employees paid
80% or less, hoping he could shame the freeloaders into paying. He found an actual
15% decline in theft after September 11, 2001. Since he operated in Washington,
D.C., many of Feldmans customers were associated with national security. So the
uptick in honesty may have had a patriotic component.

Just because two things are correlated does not mean that one causes the other.
Feldman also learned that people in small offices were more likely to pay honestly than
customers in bigger ones. People were likelier to pay when the weather was nice and
less likely to pay when it stormed. They were less honest near Christmas and
Thanksgiving (holiday pressures), but more honest around the Fourth of July and
Labor Day (when they got days off). Executives proved more dishonest than other
employees. Generally, 87% of people paid for their bagels on the honor system. The
data do not lie.

The Klan that Stetson Kennedy found was in fact a sorry fraternity of men, most of
them poorly educated and with poor prospects, who needed a place to vent and an
excuse for occasionally staying out all night.

Clobbering the Ku Klux Klan

Information asymmetry is a central concept in economics. It occurs when one party

is privy to information that another does not have, and it affects the balance of power
in their relationship. Consider the case of the Ku Klux Klan, which came into being
shortly after the U.S. Civil War. At first, it was a bunch of belligerent, war-defeated
yahoos, cavorting around the Southern countryside at night wearing white robes and
hoods, usually made from sheets. Eventually, the Klan became a racist force of vicious
terror, organized to intimidate blacks and their white supporters with vandalism,
beatings and lynchings. The Klans intimidation tactics and threats made many blacks
reluctant to stand up for their rights, already difficult in the old South because of
segregationist laws targeting blacks.
If you were to assume that many experts use their information to your detriment,
youd be right.
The Klan went through waves of intense popularity, interspersed with times when it
dwindled substantially. During the 1920s, the Klan reported having eight million
members, including U.S. President Warren G. Harding. During World War II, it
shrank greatly. But in the years afterward, it experienced a resurgence. The Klan
trumpeted its opposition to, Catholics, Jews, communists, unionists, immigrants,
agitators and other disruptors of the status quo.

A doctor may have the same economic incentives as a car salesman or a funeral
director or a mutual fund manager.
Folklorist and writer Stetson Kennedy the descendant of two Declaration of
Independence signatories, a Confederate Army officer and the Stetson who started the
famous cowboy hat company despised the Klan and its ideology. During the 1940s,
he and another man infiltrated the Atlanta Klan as spies. He learned its members-only
handshake (a left-handed, limp-wristed fish wiggle) and other secret nonsense,
including the convention of attaching the prefix Kl to normal words: Thus would
two Klansmen hold a Klonversation in the local Klavern. Kennedy decided to reveal
the Klans secret passwords and other mumbo-jumbo to embarrass its members. He
contacted political columnist Drew Pearson and the writers of the Adventures of
Superman radio show, which had millions of listeners. With the war over, Superman
no longer had evil enemies like Hitler to fight, but Superman versus the Klan sounded
like a winner to the writers.

We all learn to respond to incentives, negative and positive, from the outset of life.
Kennedy quickly passed the writers inside information from the Klan, and they
included it in their shows. This included the florid names of Klan officers: the Klaliff
(vice president), Klokard (lecturer), Kludd (chaplain), Kligrapp (secretary) and
Klabee (treasurer). Soon, children everywhere were playing Superman-against-the-
Klan games, bedecked in sheets and spouting all of the previously secret Klan
passwords and the Klans other rattlebrained rigmarole.

The typical economist believes the world has not yet invented a problem that he
cannot fix if given a free hand to design the proper incentive scheme.
Kennedy helped infantilize the Klan, exposing its spooky sheets and goofy titles as
ridiculous. In effect, he turned the Klans secret information against it. As a result, its
postwar momentum stalled. Historian Wyn Craig Wade characterized Kennedy as the
single most important factor in preventing a postwar revival of the Ku Klux Klan in the
North. Kennedy understood that information is power. He used the Klans secret
passwords and other klaptrap to cudgel the hateful organization. The Klans
mysterious, hoarded secrets had been a source of power but that didnt work after
the Adventures of Superman.

An expert doesnt so much argue the various sides of an issue as plant his flag firmly
on one side.

The Power of Information

Information can be a powerful weapon and not just against fearsome entities like the
Ku Klux Klan. Think of experts and the specialized information they possess. Those
with singular knowledge can make nonexperts fearful about almost everything:
Doctors can lead you to believe that if you dont elect to have angioplasty surgery, your
family will soon find you lying dead from a heart attack; car salespeople claim that if
you dont purchase the $50,000 steel-clad car, but buy the $25,000 vehicle instead,
you wont be protecting your loved ones; real estate agents assert that you better sell
your house now or the market will implode and you will be forced to live there forever.
Of course, the real estate salespersons commission on a home sale may dictate how
much time that agent is motivated to spend bargaining on your behalf.

You stand a greater chance of dying while dealing crack in a Chicago housing
project than you do while sitting on death row in Texas.
Parents are particularly vulnerable to experts who describe hazards that might affect
their kids. Indeed, fear is a driving motivation for parents. Being completely
responsible for helpless infants, parents are always scared of making some horrible,
harmful mistake. All of the conflicting expert opinions regarding childcare just make
parents more fearful that they will do the wrong thing. Consider this example: Molly
is eight years old. She lives near Amy and Imani, her closest friends. Amys parents
keep a gun in their house, so Mollys parents forbid her to play there. However, they
have no compunction against Molly spending time at Imanis house, which has a
backyard pool. Yet statistics show that children under the age of 10 are far more likely
to drown in a swimming pool accident (one for every 11,000 residential pools or 550
a year), than to die from a gunshot wound (one for every one million-plus guns or
175 a year).

Teachers and criminals and real-estate agents may lie, and politicians, and even
CIA analysts. But numbers dont. (The New York Times Magazine, August 3, 2003)
Selecting the right schools for their children is a challenging task for parents. Certainly,
a proper education is critical to a childs development, so school choice is important.
Consider Chicago, where numerous segregated schools continued to exist long after
the U.S. Supreme Courts 1954 ruling against racially separated schools. To correct this
problem, the Chicago Board of Education and the U.S. Department of Justice began to
work together in 1980 to integrate the citys schools. The school system decided to
permit students to apply to any high school through a lottery system. For economists,
this created a natural experiment on a grand scale wherein they could determine how
much a superior school helps children. An analysis of thousands of student records
from Chicago showed that school choice hardly matters at all in the long run. Students
who did well in the lottery and got to attend higher-ranking schools did not perform
any better than students who had to attend schools considered inferior. One exception:
students who got the opportunity to attend a technical school or career academy did
well and graduated at higher rates than anticipated.

Drug Dealers Who Live with Mom

As part of his work in sociology, University of Chicago Ph.D. candidate Sudhir

Venkatesh went to Chicagos poorest neighborhoods to survey residents about their
degree of optimism or pessimism. He gained entre with a local gang that was part of
the Black Gangster Disciple Nation and studied the gang over several years. One
member gave Venkatesh access to the gangs accounting books, which meticulously
recorded all of its financial transactions for four years. The records showed that the
local gang was one of about 100 branches of the giant Black Disciples organization.
The local leader reported to a central board of directors of about 20 men (though a
third of them...were typically imprisoned at any given time). The board let the leader
and his gang sell crack cocaine in a specific 12-square-block area. In return, the
leader sent 20% of his gangs earnings to the board members. The leader worked
directly with gang officers. Beneath them were foot soldiers who sold drugs on the
street. Think of a franchise organizational chart and youll get the idea.

According to their records, each month the gang earned $24,800 from drug sales and
$7,200 from dues and extortionary taxes. Drugs cost the gang $5,000 monthly,
wholesale. Other expenses, including weapons and the board members percentage,
totaled $9,000. From all of this, the leader himself earned $8,500 as net monthly
profit, about $100,000 annually. Each board member earned about $500,000
annually. However, the gang leaders lieutenants earned some $7 an hour each and the
foot soldiers who actually sold the drugs earned the equivalent of $3.30 an hour less
than minimum wage. Thus, most of these drug dealers could not afford their own
apartments and ended up living with their moms. However, the attraction of riches
and long-term employment with the gang was too great an opportunity for most of the
foot soldiers to pass up. The prosperous local leader shared a different fate: He went
to jail.