Difference between revisions of "Freakonomics: A Rogue Economist Explores the Hidden Side of Everything"
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[http://freakonomics.blogs.nytimes.com/ Freakonomics blog]
[http://freakonomics.blogs.nytimes.com/ Freakonomics blog]
[[:Business, Investing, Finance]]
Revision as of 05:08, 3 June 2008
Economics is often regarded as the study of dry, uninteresting financial trends and market developments, but Steven Levitt’s groundbreaking work in the field reveals that the tools of economic research can be put to use in the study of the relationships that underlie the events and problems that we encounter and hear about every day. In Freakonomics, Levitt and his co-author, journalist Stephen Dubner, offer a survey of some of the most interesting research topics Levitt has tackled during his career.
Chapter 1 defines economics as nothing more than the study of incentives and how they are pursued. Sometimes a particular set of incentives is so irresistible that people are driven to attain them through unscrupulous behavior. The authors undertake a study of several prominent instances of cheating. In each instance, Levitt devised a way of analyzing data to detect not only the presence of cheating, but also some of the patterns and incentives that may have served to compel the cheaters to act unethically. The cases that are afforded the most attention include the Chicago public school teachers who changed answers on their students’ high-stakes standardized tests and Japanese sumo wrestlers who conspired to throw certain high-stakes matches.
Chapter 2 centers on the theme of information and the way that individuals, organizations, and businesses often exploit their access to crucial information at the expense of others. First, the authors describe the way that journalist Stetson Kennedy exploited information to help bring about the downfall of the Ku Klux Klan. Then, Levitt’s research on the actions of real estate agents offers another perspective to the discussion. His analysis of real estate data found that agents behave quite differently when the homes they are selling are their own. A few other examples of applications of information asymmetry are also described.
In Chapter 3, Levitt offers an in-depth discussion of the economic workings of a Chicago drug gang, shattering the common misconception that all drug dealers are wealthy. His analysis of the financial records of a Chicago gang proved that most street-level dealers earned far less than minimum wage. He turns to the socioeconomic context of most gangs for an explanation of the incentives that compel young men to become drug dealers.
Chapter 4 sets forth what is arguably Levitt’s most controversial finding: his research revealed a strong link between the legalization of abortion in the United States in 1973 and the sharp decline in violent crime that the nation experienced in the mid-1990s. He bolsters the credibility of this claim by demonstrating that most other explanations for the crime rate drop are untenable.
Chapters 5 and 6 both address various aspects of parenting and the way that parents’ status, choices, and actions can impact the outcomes of their children's lives'. First, Levitt details the outcome of his study of the safety of backyard swimming pools, which found that children are 100 times more likely to drown in a backyard pool than they are likely to die while playing with a gun. Then, he summarizes the findings of a series of studies about parenting practices, all of which suggest that parental socioeconomic status is a more reliable predictor of high academic outcomes in children than most other parenting practices that are commonly recommended by experts, such as reading books to your children. He then turns to the study of children’s names; specifically, the different economic impacts of “white” versus “black” names. Levitt concludes with a discussion of the patterns that govern the popularity of children’s names in the United States.
Introduction: The Hidden Side of Everything
In this introductory chapter, co-author Stephen Dubner offers an overview of the diverse and seemingly unrelated topics that renowned economist and co-author Steven Levitt has addressed in his body of research. The authors state that there is no unifying theme of the book, although the aim throughout is to explore the hidden side of things and the subtle relationships that link everyday phenomena.
The book is based on four fundamental ideas:
- 1) Incentives are the cornerstone of modern life.
- 2) Conventional wisdom is often wrong.
- 3) Dramatic effects often have distant, even subtle, causes.
- 4) "Experts" use their informational advantage to serve their own interests.
Chapter 1: What Do Schoolteachers and Sumo Wrestlers Have in Common?
The authors define the study of economics as the study of incentives. How do we profit by the things that we do? And what incentives are so attractive that they compel us to act unethically in order to attain them? Levitt describes the series of research processes that he used to identify a number of Chicago public school teachers who cheated or helped their students cheat on standardized tests. He analyzed standardized test answer patterns and identified suspicious blocks of correct answers, also comparing test scores to students’ past academic performance. Eventually, a controlled retest was administered to identify cheating teachers with greater precision. The findings resulted in the termination of the boldest offenders, as well as reforms in the school system’s standardized testing procedures.
Another of Levitt’s research projects involved the analysis of the scores and bout records of Japan’s elite-level sumo wrestlers. Although allegations of cheating are rampant in the sport, no definitive proof had ever been garnered, as the techniques that are suspected to be used are very subtle. By analyzing and comparing the performances of the wrestlers in matches with vastly different stakes and potential consequences, Levitt determined that cheating does often occur in the sport.
The story of an entrepreneur who sold bagels using the honor system to office workers in Washington, D.C. concludes the chapter. The owner/operator kept detailed financial records, and by analyzing them, Levitt was able to discern a number of remarkably consistent patterns in the behavior of those who took bagels without paying for them. In this story, Levitt demonstrates that cheating, like almost everything else that involves incentives, can be predicted.
Chapter 2: How is the Ku Klux Klan like a Group of Real-Estate Agents?
The authors assert that information asymmetry is one of the most powerful economic tools. Entire industries have flourished and many significant historical events have transpired as the result of an imbalance in the flow of information. In keeping with this theory, the authors offer the story of a man who helped cripple the racist Ku Klux Klan simply by widely disseminating their secrets.
Stetson Kennedy infiltrated the group in the World War II-era and systematically documented the secret rituals and codes of the organization. Kennedy then supplied the records to Hollywood writers, who used the information to create a long-running story arc on the wildly popular Superman radio serial. Children across the United States imitated the shows in their schoolyard games, and gradually, the mystery, grandeur, and influence of the group were profoundly diminished.
The authors relate a number of other instances of information asymmetry being used as an economic tool, including, most prominently, the practices of real estate agencies. By analyzing data about real estate agents common practices when they are selling their own houses, Levitt discovered that they may not always have their clients’ best interests at heart. The Internet, the authors note, has prompted a massive shift in many industries simply by providing consumers with more information than they have ever readily had access to. Other examples of information asymmetry and resulting misjudgments are explored in the behaviors of game show contestants and users of Internet dating services.
Chapter 3: Why Do Drug Dealers Still Live with Their Moms?
This chapter offers a detailed glimpse into the economics of a drug-dealing street gang. The authors follow the research efforts of sociologist Sudhir Venkatesh, whose years conducting field studies in the housing projects of Chicago granted him unprecedented access to the inner workings of the gang. Venkatesh befriended many of his research subjects, one of whom gave him several years of financial records kept by the gang, which Venkatesh later provided to Levitt.
With extensive analysis of the data, Levitt was able to debunk the common perception that crack dealers are all very wealthy individuals. He found that although a few participants profit mightily from their involvement, these are usually the higher-ups who lead the organization, rather than the large numbers of street dealers who form the lower ranks of the group. Levitt compares the organizational structure of the gang to McDonalds, in which a comparatively few executives and managers prosper from the labor of thousands of low-wage workers. This comparison proved to be particularly apt when he found that most street dealers made less than minimum wage, while also bearing a 1-in-4 risk of death.
The authors relate the rise of crack in inner-city America to the historical crime pattern in the country and the social progress of the African American community. The chapter ends with an overview of the wave of violent crime that gripped the country in the early 1990s, and then began a mysterious and rapid decline.
Chapter 4: Where Have All the Criminals Gone?
In this chapter, the authors set forth the controversial claim that has generated more attention than any other aspect of the book: Levitt’s research has suggested that the 1973 legalization of abortion was the cause of the dramatic decline in violent crime that had become apparent by the mid-1990s. Recognizing the volatility of this argument, the authors approach it from numerous perspectives, methodically challenging and undermining all of the most common theories that have been advanced to explain the sudden crime drop. In a detailed analysis, they demonstrate that factors such as improved policing strategies, new prisons, diminished drug demand, an aging population, stricter gun control, a strong economy, and a number of other possible explanations simply do not correlate with the available crime data.
The authors note a number of variables that are strongly correlated with criminality, such as poverty or an unstable family environment, are also likely to be the same reasons that compel pregnant young women to seek abortions. Levitt’s research suggests that the drop in violent crime in the United States occurred at the same time that the first wave of babies conceived after the legalization of abortion were entering late adolescence. Presumably, many of the additional 1.6 million children who would have been born annually if abortion had remained illegal would have been at high risk for engaging in violent crime. Although the authors refrain from taking an ideological stance on the issue, they do conclude that women with the right to choose abortion tend to make good decisions, based on the crime data.
Chapter 5: What Makes a Perfect Parent?
Several years before Freakonomics was published, author Steven Levitt lost his infant son Andrew to a sudden, fatal bout of pneumococcal meningitis. In the aftermath of this tragedy, Levitt and his wife became active in several support groups for bereaved parents. Even as he sought help and guidance for the terrible loss, Levitt noticed the disproportionate number of parents in the groups whose children had drowned in backyard swimming pools. This prompted him to research the issue, as well as a number of other aspects of parenting, from an economic point of view. His research uncovered the high risk of allowing children to play in swimming pools: Levitt estimates that a child is more than 100 times more likely to die in a swimming pool than playing with a gun.
In a series of subsequent articles, Levitt explored other facets of parenthood and their outcomes. He determined that in spite of the cottage industry of parenting and the millions of how-to books on the subject sold every year, who you are matters much more than what you do. In other words, positive parenting outcomes are linked more strongly to factors such as socioeconomic status and parental education than any specific parenting practices. Factors that are important in determining high standardized test scores in children include: highly educated parents, high socioeconomic status, maternal age of greater than thirty when the child was born, low birth weight, English as the primary language spoken in the home, parental involvement in the PTA, and many books in the home environment. Also, adopted children tended to have lower standardized test scores than their non-adopted peers.
Chapter 6: Perfect Parenting, Part II, or: Would a Roshanda by Any Other Name Smell as Sweet?
In this chapter, the authors extend the discussion of parenting with an overview of more economic aspects of parental choices. Specifically, they focus upon the economic implications of children’s names, especially the overtly ethnic African-American names that have become common over the last several decades. The authors tied this issue to a larger question about contemporary black culture in the United States: is distinctive black culture merely a reflection of the economic gap between whites and blacks, or has it actively caused the gap to widen?
Using several decades of name data drawn from California birth certificate records, Levitt’s analysis revealed a number of interesting trends. The authors cite previous research that has shown that similar résumés with white and distinctively black names result in job offers being extended to the white-sounding applicant far more frequently than the black-sounding applicant. Among other things, it was determined that having a distinctively black name was linked to lower attainment and negative life outcomes in terms of employment, income, and education.
Levitt then turned to the question of how names become popular among white Americans. In addition to the general trend of increasingly unique names for white children, Levitt describes a pattern by which highly educated parents popularize obscure names, gradually compelling the names to achieve broader popularity. Finally, after a period of several years, white parents from lower socioeconomic classes adopt the names, prompting a selection of new names among highly-educated white parents, and the repetition of another cycle.
Epilogue: Two Paths to Harvard
The life paths of two Harvard graduates who may have seemed to be locked into divergent patterns of achievement based on their backgrounds are outlined. Ted Kaczynski, also known as the Unabomber, came from a privileged background and had access to all of the resources that are typically correlated with success, whereas Roland G. Fryer, an African-American man who was raised in an impoverished, unstable family environment, is now a promising Harvard economist. The book ends with this brief reminder that there are limits to the ability of economic analysis to predict every possible outcome.