Freakonomics: A Rogue Economist Explores the Hidden Side of Everything

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Table of Contents

Overall Thoughts

I loved reading this book. The ideas are consistently communicated in a clear and sensitive way. I love how data-driven every argument is. I particularly enjoyed the questions for the reader: which set of multiple choice answers contains modifications, which real-estate ad terms correlate with higher and lower sale prices, etc.

Despite some scholastic experience with economics, I believe that this book is accessible to all. The book teaches one how to analyze information from the perspective of a rational, data-driven economist.

There are some nice notes at the end of the book which add extra interesting details, and point towards referenced papers and datasets.

High-Level Summary

Economics models people as utility-maximizing agents, who respond to incentives. Predicting the emergent behavior of a system of incentives is difficult — thus, the rules of a system should be changed slowly over time, with immense caution. This difficulty stems from a variety of counterintuitive reasons and phenomena:

  • Incentive substitution, particularly with moral incentives
    • E.g. parents being charged for being late to pick up their kids from school
  • Environment-specific subtleties
    • E.g. sumo wrestlers interacting several times over several years
    • E.g. the difference in the monetary gains that real-estate agents receive when selling your home vs. their own
    • E.g. the bias against reporting local crimes, in order to avoid reducing the value of your home
  • System complexity
    • E.g. explaining the crime rate decrease in the US in the 1990s
  • Cognitive biases
    • E.g. assuming that someone died because of their recent painful snake bite
    • E.g. incorrectly estimating the risk of your child's exposure to a house with a pool vs. a house with a gun
  • Confusing correlation with causation
    • E.g. changing a common lower class name to a common upper class name and expecting more monetary success

Being data-driven helps to avoid common pitfalls, and leads to better understandings of systems when your intuition fails you.

Notes

Introduction: The Hidden Side of Everything

  • Crime rates example
    • Incorrectly attributed crime rate drop to specific and recent human initiatives
      • Logically-sound theories
      • Encouraging by implying that we understand and solved the crime problem
      • "These theories made their way, seemingly without friction, from the experts' mouths to the journalists' ears to the public's mind."
    • Instead was due to (the uncomfortable) legalization of abortion in more states
  • Real estate agent example
    • Marginal gain in percentage cut for real estate agents is not great enough to incentivize them to work harder to sell your house for a greater price
  • Informational advantage of doctors, lawyers, contractors
    • When business is tough, incentive to recommend more expensive solutions than they would when business is good
  • Use data wherever possible
  • Money doesn't buy elections
    • Confusing correlation and causation
  • Book is about understanding what relates to/causes what, and to what extent, using a data-driven approach
  • "Incentives are the cornerstone of modern life"
  • "The conventional wisdom is often wrong"
  • "Dramatic effects often have distant, even subtle, causes"
  • ""Experts" — from criminologists to real-estate agents — use their informational advantage to serve their own agenda"
  • "Knowing what to measure and how to measure it makes a complicated world much less so"

Chapter 1: What do Schoolteachers and Sumo Wrestlers Have in Common?

  • "Economics is, at root, the study of incentives: how people get what they want, or need, especially when other people want or need the same thing"
  • "There are three basic flavors of incentive: economic, social, and moral"
  • Incentive substitution
    • Moral incentive substituted with economic incentive
      • Penalizing parents for being late to pick up their children example
        • Introduction of small monetary penalty for late parents
      • Blood donations example
        • Introduction of a small stipend for donating blood
  • Everyone cheats
    • Teachers in public schools example
      • Upon the introduction of high-stakes testing, where strong performance results in raises/bonuses, and poor performance results in firing
    • Detecting cheating with statistical tools/software
      • Student scores over time example
    • Sumo wrestlers example
      • Winning the majority of 15 matches has huge benefits, incentive to throw the game when you have won the majority of your matches against an opponent who has not, for future benefit against the same opponent
    • Bagels example
      • Investigating white collar crimes by giving bagels to companies where the method of payment is an honor system

Chapter 2: How is the Klu Klux Klan Like a Group of Real-Estate Agents?

  • Power of information asymmetry
    • Reducing the power of the Klu Klux Klan by making public their secrets
    • Idea of the power of "random violence"
      • Lack of need for actual physical abuse to cultivate fear
    • Plummeting in the price of term life insurance due to Quotesmith.com making the prices offered by all insurance vendors available
    • A car loses 25% of its value as soon as it is taken off the lot, due to the assumption that if you are trying to sell it, it's because of some hidden information you were unaware of, and that I suspect I am unaware of.
      • If there is some hidden thing that is wrong, you're much better off selling after a year, to blend in with those that are not selling for hidden reasons
  • "The conversion of information into fear"
  • Real-estate
    • Since agents only receive a small percentage of the final sale price as commission, there is incentive to:
      • Not work hard to maximize the price of the final sale, since this only results in a small added gain for the agent
      • "Let potential buyers know that a house can be bought for less than its listing price," since again the monetary difference to the agent is negligible, but the locking in of a sale is very valuable
    • The lingo: common real-estate ad terms — pg71
      • Terms correlated to a higher sale price
        • Literal, unambiguous physical descriptions of the house
          • Granite, state-of-the-art
      • Terms correlated to a lower sale price
        • Ambiguity
          • Fantastic, charming
        • False enthusiasm
          • !
  • Discrimination
    • Taste-based
    • Information-based
  • Online dating analysis
  • Ironically, it turns out the story of Kennedy and the Klu Klux Klan turns out to have been embellished. Although many sources report the same story, he is almost always the original source. Kennedy truly is a master of information asymmetry

Chapter 3: Why Do Drug Dealers Still Live With Their Moms?

  • Asking good questions
    • Bias towards ideas that align with our preconceived beliefs
    • Conventional wisdom
      • "We associate truth with convenience, with what most closely accords with self-interest and personal well-being or promised best to avoid awkward effort or unwelcome dislocation of life"
      • "We adhere [...] to those ideas which represent our understanding"
    • Search where conventional wisdom may be false, due to "sloppy or self-interested thinking"
  • Fabricating statistics for journalists to spread a message that provokes positive action
    • Absurd homelessness statistics
  • Creating conventional wisdom through advertising
    • Listerine example
  • "Journalists need experts as badly as experts need journalists"
  • Crack cocaine gangs
    • Paper by Sudhir Venkatesh and Steven Levitt
    • Similar structure and wage skewage to corporate America
    • Answer to chapter title: drug dealers actually make very little money, so have no choice but to live with their mothers
  • Factors determining wage
    • Number of people willing and able to do the job
    • Specialized skills a job requires
    • Unpleasantness of a job
    • Demand for services that the job fulfills

Chapter 4: Where Have All The Criminals Gone?

  • Nicolae Ceaușescu, the communist dictator of Romania from 1966 for around 20 years
    • Made abortion illegal
      • Was the main form of birth control, with four abortions for every live birth!
      • Within one year, the birth rate doubled
      • Cohort of children, compared to those born a year earlier, did worse in every measurable way:
        • Test lower in school
        • Less success in labor market
        • Much more likely to become criminals
  • Crime rate rise in America in the 1970s and drop in the 1990s
    • Theories in order of number of citations in articles (pg119)
      • Innovative policing strategies
      • Increased reliance on prisons
      • Changes in crack and other drug markets
      • Aging of the population
      • Tougher gun-control laws
      • Strong economy
      • Increased number of police
      • Other
    • Deeper analysis in the order they appear in the chapter
      • Theory of strong economy
        • A stronger job market only really reduces crimes with a direct financial motivation — burglary, robbery and auto theft — as opposed to violent crimes
      • Increased reliance on prisons
        • Reversing the question — why did crime rise?
          • More lenient justice system
          • Politicians were softer on crime, "for fear of sounding racist" since minorities "commit a disproportionate share of felonies"
        • Justice system became very strict, "fifteenfold increase in the number of people sent to prison for drug charges"
        • Strong link between increased punishment and lower crime
          • Deterrent for would-be criminals who are free
          • Prophylactic for would-be criminal who is in prison
        • Note cons of prison system
          • Doesn't address root causes of crime
          • Expensive: $25,000/year per prisoner
      • Increased number of police
        • Correlation and causation
          • Hard to prove causality (that more police causes less crime):
            • Since people are willing to pay more for police when crime rises
            • Need a situation where more police are being hired independently from changes in the crime rate
              • Vote-hungry politicians
            • Conclusion: yes, causality
        • Increased police acts as a deterrent and helps catch more criminals
      • Innovative policing strategies
        • A great story for articles — "bona fide heroes rather than simply a dearth of villains"
        • William Bratton
        • Little effect on the decline of crime
          • Innovation came after the start of the decline
          • Crime went down everywhere, but innovation only happened in a few cities
      • Tougher gun laws
        • Very complex:
          • Who has the gun
          • Black market
          • Permanence of possession (once you have one, you have one forever)
        • Seems that right-to-carry laws don't reduce crime
      • Changes in crack and other drug markets
        • Strong financial incentive to be one of few drug leaders
          • People were very willing to kill over it
        • Change: price of cocaine had been falling for years, reduced profits means reduced incentive
        • Roughly 15% of crime drop in the 1990s
          • Though note "crack was responsible for far more than 15 percent of the crime increase of the 1980s"
      • Aging of the population
        • "Average sixty-five-year-old is about one-fiftieth as likely to be arrested as the average teenager"
        • Abortion
          • Was illegal from 1900 throughout America
          • Was dangerous and expensive
          • Poor women had lower access to birth control
          • By 1973, abortion was legal throughout America
            • Roe v. Wade
          • Huge boom in utilization of abortion
          • Impact
            • Infanticide, shotgun marriages and the number of babies put up for adoption fell dramatically
            • Crime
              • "The early 1990s is when the first cohort of children born after Roe v. Wade was hitting its late teen years — the years during which young men enter their criminal prime"
              • Can show causality by comparing crime rates in states that had abortion legalization before others
              • Correlation between each state's abortion and crime rate, even when controlling for other factors that influence crime
          • Abortion had an "unintended benefit" on crime
          • "When the government gives a woman the opportunity to make her own decision about abortion, she generally does a good job of figuring out if she is in a position to raise the baby well. If she decides she can't, she often chooses the abortion"
  • Confusing correlation and causation
  • Cognitive biases
    • We have evolved with a tendency to link causality to things we can touch or feel
    • We believe especially in near-term causes
      • E.g. Snake bites friend, friend screams with pain, friend dies → snake caused pain and death
  • Valuing human body parts with compensation in the case of work-related physical injury

Chapter 5: What Makes a Perfect Parent?

  • Contradictory parenting advice
    • Nuanced arguments often don't get much attention
    • Playing on people's emotions — in particular fear — helps to distract people away from rationality, and spread a message
  • Economics of fear
    • Fear in the present moment
    • Control
    • Dread
  • Misunderstanding risk
    • "The risks that scare people and the risks that kill people are very different"
    • Allowing your kid to play in a house with a pools vs. a gun
    • Comparing death rates of cars and planes and not conditioning on things like total time spent by people using such equipment
      • Death rate actually becomes equal
  • Investigating the effect of parents on their children
    • Nature vs. nurture
    • Using school performance as a metric
    • Chicago Public School system data as a basis, since students who enrolled in the school-choice program assigned students to high schools using a lottery
      • Students who won the lottery and went to a "better" school did no better than equivalent students who lost the lottery and were left behind
      • Refutation that by high school, scholastic habits and performance are determined
      • Early Childhood Longitudinal Study measured the academic progress of thousands of younger children, and gathered large amounts of survey information: race, socioeconomic status, but also whether the parents spanked their children, and how often, and whether the parents took them to libraries or museums
      • After controlling for income and education level of child's parents, and the mother's age of birth of her first child, the black-white test score gap is basically eliminated
      • Black students in good schools don't lose ground to their white counterparts
      • Black students in good schools outperform whites in poor schools
      • Poor schools: gang problems, nonstudents loitering in front of the school, lack of PTA funding
  • The black-white income gap is virtually eradicated if the black's lower eight-grade test scores are taken into account
  • "Acting white"
    • Suffering severe social punishment
  • Regression, and its ability to investigate correlation, and not causation
    • X can cause Y, Y can cause X, or some other factor causes both X and Y
    • Causation with all factors held constant except one variable
    • Multidimensional regression artificially does this
  • Eight factors that relate with a child's scholastic achievement and eight factors that don't — pg 168
    • Nice visualizations
      • All factors together
      • Sixteen factors split into eight that relate and eight that don't relate
      • Sixteen factors split into couples where one relates and one doesn't
    • Conclusions
      • Factors that matter are descriptions of what the parents are
        • Well educated, successful, healthy tend to have children who test well in school
      • Factors that don't matter are descriptions of what the parents do
        • Museum visits, spankings, reading and watching television don't relate to scholastic performance
      • Parents matter a great deal, but by the time most people pick up a parenting book, it is far too late
        • Supported by adoption data analysis, where the adopting parents are smarter, better educated, and more highly paid than the baby's biological parents
        • Case for the influence of genetics
        • Case for the long term influence of parents, beyond school

Chapter 6: Perfect Parenting Part II; Or: Would a Roshanda by Any Other Name Smell As Sweet?

  • Investigating the relationship between name and success
    • Boys named Winner and Loser Lane
    • Black vs. white names
      • "White" resumes obtain more job interviews
    • "Acting white"
      • Betrayal to your community
    • Changing your bad name into a good one
      • Again, while "on average a person with a distinctively black name [...] does have a worse life outcome, this isn't the fault of their names".
      • "If two black boys [one with a white name and one with a black name] are born in the same neighborhood and into the same familial and economic circumstances, they would likely have similar life outcomes. But, the kind of parents that name their son [a white name] don't tend to live in the same neighborhoods or share economic circumstances with the kind of parents who name their son [a black name]".
      • "Name is an indicator — not a cause"
    • High-end names and low-end names
      • The evolution of trends overtime

Sources

Main image: "Green Orange" by Max Griss, hosted by Unsplash, license

Book: Freakonomics: A Rogue Economist Explores the Hidden Side of Everything, by Steven D. Levitt and Stephen J. Dubner

Chapter 3: Why Do Drug Dealers Still Live With Their Moms?
Chapter 4: Where Have All The Criminals Gone?