🚀 The Book in 3 Sentences
- The science of economics is much more of a study of human behavior which is guided by incentives more than anything, and therefore very closely related to psychology.
- What seems to be, or is presented as, the root cause for any unusual societal or economical development will sometimes have vastly differing other causes which are not in line with the narratives of the people propagating them.
- Thinking like a “rogue economist” as the authors are doing and exercising curiosity where ever possible, will lead to new discoveries which have the potential to guide our future decision making.
It’s taken me way too long to finally read this classic book which is also one of the books I very much like to give away as a gift, mainly because of the brilliant podcast of the same name by one of the authors.
The book is very close to the podcast, unsurprisingly. The chapters deal with a diverse range of topics which have in common that there’s something hidden beneath it which isn’t obvious at first sight. This sounds conspiratorial, but it’s all very much data driven. The author, Steven Levitt, enjoys a solid standing in the world of economists, and his co-author, Stephen J. Dubner, who also runs the podcast, is the one who can bring it all into a form that’s entertaining to read. I especially like the dry and almost hidden humor he brings to the words. Sometimes it’s like you can feel the little twinkle in his eye when reading a sentence.
The range of topics is huge, as stated. There’s a lot about drug gang’s inner workings, abortion laws and crime stats, a long chapter on school teachers and Sumo wrestlers cheating at their professions, one on the patterns of child naming, one on parenting and the impact of different schools and the outcomes of the children, and even a bit of real-estate pricing. But the thing is that you don’t have to be into any of these topics. They become interesting because of the unexpected connections and explanations of unusual phenomena.
For me, the main benefit of the book, apart from being thoroughly entertaining, was the realization that we are all just humans with lots of faults, and that’s not something to be angry at but something to learn more about and try to understand.
🍀 How the Book Changed Me
- Being more curious and questioning believes which seem to be stuck in everyone’s mind is not just a fun thought exercise but can change lives. We should never stop to ask questions.
- Understanding incentives. Whenever some authorities or experts claim something, thinking about their incentives is a good first move to make sense of it and to get the whole picture.
- Everyone, including school teachers and Sumo wrestlers, cheats, it’s just a question of where they set the bar. But it’s just human nature to try and get more for less and it might even be one of the reasons that got us here. This just means we need to change the incentive structures so they encourage the right behaviors.
🔝 My Top Quotes
Morality, it could be argued, represents the way that people would like the world to work—whereas economics represents how it actually does work.
A syllogism, after all, can be a magic trick: All cats die; Socrates died; therefore Socrates was a cat.
📔 Highlights & Notes
But experts are human, and humans respond to incentives. How any given expert treats you, therefore, will depend on how that expert’s incentives are set up. Sometimes his incentives may work in your favor.
[..] it turns out that a real-estate agent keeps her own home on the market an average of ten days longer and sells it for an extra 3-plus percent, or $ 10,000 on a $ 300,000 house. When she sells her own house, an agent holds out for the best offer; when she sells yours, she encourages you to take the first decent offer that comes along.
Now picture two candidates, one intrinsically appealing and the other not so. The appealing candidate raises much more money and wins easily. But was it the money that won him the votes, or was it his appeal that won the votes and the money?
Here’s the surprise: the amount of money spent by the candidates hardly matters at all. A winning candidate can cut his spending in half and lose only 1 percent of the vote.
Incentives are the cornerstone of modern life. And understanding them—or, often, ferreting them out—is the key to solving just about any riddle, from violent crime to sports cheating to online dating.
“Experts”—from criminologists to real-estate agents—use their informational advantage to serve their own agenda.
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.
In this case, they wanted to learn about the motivation behind blood donations. Their discovery: when people are given a small stipend for donating blood rather than simply being praised for their altruism, they tend to donate less blood.
Whatever the incentive, whatever the situation, dishonest people will try to gain an advantage by whatever means necessary.
For every clever person who goes to the trouble of creating an incentive scheme, there is an army of people, clever and otherwise, who will inevitably spend even more time trying to beat it. Cheating may or may not be human nature, but it is certainly a prominent feature in just about every human endeavor. Cheating is a primordial economic act: getting more for less.
A broad swath of psychological and economic research has shown that people will pay different amounts for the same item depending on who is providing it.
[Paul Feldman, an entrepreneur who sells bagels to companies using an honor system] also believes that employees further up the corporate ladder cheat more than those down below. He got this idea after delivering for years to one company spread out over three floors—an executive floor on top and two lower floors with sales, service, and administrative employees.
“How selfish soever man may be supposed,” [early economist Adam] Smith wrote, “there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it, except the pleasure of seeing it.”
A new car that was bought for $ 20,000 cannot be resold for more than perhaps $ 15,000. Why? Because the only person who might logically want to resell a brand-new car is someone who found the car to be a lemon. So even if the car isn’t a lemon, a potential buyer assumes that it is. He assumes that the seller has some information about the car that he, the buyer, does not have—and the seller is punished for this assumed information.
The Internet has accomplished what even the most fervent consumer advocates usually cannot: it has vastly shrunk the gap between the experts and the public.
If you were to assume that many experts use their information to your detriment, you’d be right. Experts depend on the fact that you don’t have the information they do.
The point here is not that real-estate agents are bad people, but that they simply are people—and people inevitably respond to incentives.
Of course an expert, whether a women’s health advocate or a political advisor or an advertising executive, tends to have different incentives than the rest of us. And an expert’s incentives may shift 180 degrees, depending on the situation.
[One immutable law of labor states that] when there are a lot of people willing and able to do a job, that job generally doesn’t pay well. This is one of four meaningful factors that determine a wage. The others are the specialized skills a job requires, the unpleasantness of a job, and the demand for services that the job fulfills.
Compared to Romanian children born just a year earlier, the cohort of children born after the abortion ban would do worse in every measurable way: they would test lower in school, they would have less success in the labor market, and they would also prove much more likely to become criminals.
Even among prisoners on death row, the annual execution rate is only 2 percent—compared with the 7 percent annual chance of dying faced by a member of the Black Gangster Disciple Nation crack gang. If life on death row is safer than life on the streets, it’s hard to believe that the fear of execution is a driving force in a criminal’s calculus.
It might be worthwhile to take a step back and ask a rudimentary question: what is a gun? It’s a tool that can be used to kill someone, of course, but more significantly, a gun is a great disrupter of the natural order. A gun scrambles the outcome of any dispute.
Abortion in the twentieth century was often dangerous and usually expensive. Fewer poor women, therefore, had abortions. They also had less access to birth control. What they did have, accordingly, was a lot more babies.
These two factors—childhood poverty and a single-parent household—are among the strongest predictors that a child will have a criminal future.
In the early 1990s, just as 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—the rate of crime began to fall.
Legalized abortion led to less unwantedness; unwantedness leads to high crime; legalized abortion, therefore, led to less crime.
As it happens, economists have a curious habit of affixing numbers to complicated transactions. Consider the effort to save the northern spotted owl from extinction. One economic study found that in order to protect roughly five thousand owls, the opportunity costs—that is, the income surrendered by the logging industry and others—would be $46 billion, or just over $9 million per owl. After the Exxon Valdez oil spill in 1989, another study estimated the amount that the typical American household would be willing to pay to avoid another such disaster: $31.
What the link between abortion and crime does say is this: 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.
An expert must be bold if he hopes to alchemize his homespun theory into conventional wisdom. His best chance of doing so is to engage the public’s emotions, for emotion is the enemy of rational argument. And as emotions go, one of them—fear—is more potent than the rest.
The per-hour death rate of driving versus flying, however, is about equal. The two contraptions are equally likely (or, in truth, unlikely) to lead to death.
(Obsessive parents know who they are and are generally proud of the fact; non-obsessive parents also know who the obsessives are and tend to snicker at them.)
The answer will not be heartening to obsessive parents: in this case, school choice barely mattered at all. It is true that the Chicago students who entered the school-choice lottery were more likely to graduate than the students who didn’t—which seems to suggest that school choice does make a difference. But that’s an illusion. The proof is in this comparison: the 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. That is, a student who opted out of his neighborhood school was more likely to graduate whether or not he actually won the opportunity to go to a new school. What appears to be an advantage gained by going to a new school isn’t connected to the new school at all. What this means is that the students—and parents—who choose to opt out tend to be smarter and more academically motivated to begin with. But statistically, they gained no academic benefit by changing schools.
A child whose parents are highly educated typically does well in school; not much surprise there. A family with a lot of schooling tends to value schooling. Perhaps more important, parents with higher IQs tend to get more education, and IQ is strongly hereditary.
But this is not to say that parents don’t matter. Plainly they matter a great deal. Here is the conundrum: by the time most people pick up a parenting book, it is far too late. Most of the things that matter were decided long ago—who you are, whom you married, what kind of life you lead. If you are smart, hardworking, well educated, well paid, and married to someone equally fortunate, then your children are more likely to succeed. (Nor does it hurt, in all likelihood, to be honest, thoughtful, loving, and curious about the world.) But it isn’t so much a matter of what you do as a parent; it’s who you are.
[On the topic of the popularity of certain names to give to newborn children:] There is a clear pattern at play: once a name catches on among high-income, highly educated parents, it starts working its way down the socioeconomic ladder.
But as a high-end name is adopted en masse, high-end parents begin to abandon it. Eventually, it is considered so common that even lower-end parents may not want it, whereby it falls out of the rotation entirely. The lower-end parents, meanwhile, go looking for the next name that the upper-end parents have broken in.
What the California names data suggest is that an overwhelming number of parents use a name to signal their own expectations of how successful their children will be. The name isn’t likely to make a shard of difference. But the parents can at least feel better knowing that, from the very outset, they tried their best.
Selected “Freakonomics” Columns From The New York Times Magazine
On U.S. roads, meanwhile, roughly 185,000 drivers, passengers and motorcyclists have been killed during this same time frame. Those 185,000 deaths, though, came over the course of nearly 15 trillion miles driven. This translates into one fatality for every 81 million miles driven.
So Nascar has reduced a danger incentive but imposed a financial incentive, thus maintaining the delicate and masterful balance it has cultivated: it has enough crashes to satisfy its fans but not too many to destroy the sport—or its drivers. (Nascar fans love crashes the way hockey fans love fights; when you watch the Speed Channel’s edited replays of Nascar races, the plot is always the same: green flag, crash, crash, crash, crash, crash, checkered flag.)
A survey by Marketing Workshop Inc. found that only 30 percent of recipients use a gift card within a month of receiving it, while Consumer Reports estimates that 19 percent of the people who received a gift card in 2005 never used it.
A Q&A with the Authors
Books being what they are—not just stories and information, but stories and information that people like to talk about with other people—there is obviously an extra incentive to read what everyone else is reading.