Freakonomics | Study Guide

Steven D. Levitt & Stephen J. Dubner

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Freakonomics | Chapter 2 : How Is the Ku Klux Klan Like a Group of Real-Estate Agents? | Summary

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Key Takeaways

The authors examine the Ku Klux Klan from social and economic standpoints. The emotional reverberations of Klan activities may be implied, but the topic of lynching, for example, is discussed in terms of incentives and data, not morality.

  • The Ku Klux Klan, founded shortly after the Civil War with the purpose of terrorizing and killing former slaves, came back to life after the 1915 premier of the film The Birth of a Nation in which the Klan portrayed itself as saving white culture and civilization.
  • By the 1920s the Ku Klux Klan had eight million members and a great deal of secret information.
  • Stetson Kennedy, a southerner with family members in the Klan but not a member himself, wrote against bigotry and saw the Klan as a terrorist danger against which the public was powerless.
  • Kennedy spent years interviewing Klan leaders and turned his material into the book The Klan Unmasked, hoping to decrease the group's power.
  • One of the Klan's terrorist methods was lynchings, which, when Levitt and Dubner examined the data, showed marked decreases from the 1890s, with 1,100, to the 1960s, with 3.
  • The authors reason the Klan used lynchings as a successful incentive to keep the black population frightened, prevent them from voting, and maintain Jim Crow laws. Decreasing numbers of lynchings indicate a successful incentive.
  • Determined to fight the Klan, Kennedy began feeding Klan reports to radio journalists, and as secret information got out attendance at Klan meetings began to fall.
  • He revealed passwords and codes about lynchings and other terrorist behavior, which found their way on air and thus took away much of the Klan's power, for once everyone knows one's secrets they become useless.
  • He held up to ridicule the trappings of this secretive hate group, thus hastening its official demise.
  • In fact, Kennedy did much to publicize Klan activities and turn public opinion against the organization and the people in it, whom he considered "a sorry fraternity of men ... poorly educated ... with poor prospects, who needed a place to vent."
  • He exposed not only the information but also the workings of the organization as "a slick money-making operation ... for those near the top," engaging in protection rackets, donation solicitation, and selling life insurance.
  • Kennedy understood the power of information asymmetry: that one person or organization holding more information than the other has greater power. With the Klan's secret information made public, the organization lost power.
  • Like Stetson Kennedy's exposure of Klan secrets, the Internet has revealed previously secret information, thus taking away power from other sectors of the economy, such as life insurance, auto sales, and real estate.
  • In the late 1990s the cost of term life insurance fell significantly for reasons no one could discern.
  • In retrospect, the Internet played a role in this shift because people could instantly look up and compare different companies' offers.
  • It is common for one person to have more information than the other in a transaction—typically an expert knows more than a consumer.
  • Experts have long depended on having more information than consumers, and to maximize that advantage, experts tend to manipulate consumers' fears.
  • Corporations have more information than stockholders and may withhold, twist, or falsify it for their own gains.
  • People rely on realtors' knowledge of the real estate market when selling property and count on their expertise despite the 6 percent commission fee.
  • Sellers think realtors can maximize the property's value, understand nuances of the market, and most of all, have the same goal: to sell the property for the highest price.
  • A real estate agent's incentive is to make the best possible deal, which may or may not include getting the highest price for a sale, given their commissions are considerably less than 6 percent after they're divided among all parties involved in the sale.
  • Examining data from sales of realtors' own property versus those of clients shows realtors take longer to sell their own properties in the hope of gaining a bigger profit, which they typically do because they keep the extra money rather than earn a small amount of commission when the seller is not the realtor.
  • Like the Ku Klux Klan, the real estate field has its own code terms, or information asymmetry. For example, terms correlated to higher sale prices are granite, maple, state-of-the-art, and gourmet; terms correlated to a lower sale price are charming, great neighborhood, spacious, and fantastic. Well maintained often means "old but not falling apart" and sounds more positive than its "real estate" meaning.
  • Realtors may reveal to others information unfavorable to the seller, such as the lowest acceptable price, and may put pressure on both buyers and sellers to act hastily or against their best interests.
  • Other information, once difficult to obtain, is now readily accessible on the Internet, thus decreasing the information asymmetry between realtors and clients.
  • These are economic incentives rather than judgments on morality.
  • People abuse information asymmetry in personal settings as well, such as online dating sites.
  • Multiple kinds of information can be examined through these sites: what people write in their personal profiles and how other people respond.
  • Data from one site revealed considerable information asymmetry about racial preference.
  • In their profiles, 50 percent of white women and 80 percent of white men claimed they were open to dating all races, but the men sent 90 percent of their messages to white women, and white women sent 97 percent of their messages to white men.
  • This disparity indicates people would rather come across as open-minded while acting differently in private.
  • This disparity also shows up in politics and voting, with voters attempting to appear more open-minded in polls than they demonstrate with their actual votes.
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