Freakonomics | Study Guide

Steven D. Levitt & Stephen J. Dubner

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Freakonomics | Introduction : The Hidden Side of Everything | Summary

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Key Takeaways

The authors open with a controversial economic puzzle that aptly demonstrates the fact that conventional wisdom and obvious correlations are not always as they seem—all it takes to apply economic theory, it turns out, is an understanding of how incentives work.

  • The early 1990s saw a national rise in crime in the United States, with experts agreeing the situation would worsen.
  • According to the media, the cause for this upswing was the "so-called superpredator": the American teenager.
  • However, crime actually decreased during the later 1990s—in every category and in every location.
  • The magnitude of this reversal astounded observers and pundits: the teenage murder rate alone fell more than 50 percent within five years, and by 2000 the murder rate in the United States had dropped to its lowest level in 35 years.
  • Many experts attributed the drop to a booming economy, stricter gun control laws, or new policing strategies.
  • Although these theories became conventional wisdom, they weren't actually founded in facts lying below the obvious.
  • The cause dates back to Roe v. Wade in 1973 when the Supreme Court legalized abortion in the entire United States.
  • The Roe v. Wade decision contributed to the most startling crime reduction in recorded history because children born into unfortunate circumstances are statistically those most likely to commit crimes later in life.
  • The majority of the women seeking abortions were poor, unmarried, and teenagers themselves, usually unable to provide a supportive environment for a child.
  • Decades later—as those unborn children would have become teenagers or young adults themselves—the crime rate plummeted.
  • Regarding real estate, a commonly accepted notion is one should use a realtor in selling one's home despite the typical 6 percent agent fee.
  • Most people accept this fee because they think realtors are experts in their field—able to maximize the house's value, understand nuances of the housing market, and most of all, have the same goal as the seller: to sell the house for the highest price.
  • However, 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, for they keep the extra money rather than earn a small amount of commission.
  • In politics, conventional wisdom holds a candidate's wealth can help immensely in an election—data show the more money candidates spend on a campaign, the more likely they are to win.
  • Front-runners and incumbents raise more money because the incentives for donors are greater: aiding a close race or hoping for favors after a win.
  • Studying candidates who compete with each other in multiple elections shows a candidate's voter appeal matters more than the amount of money spent on the campaign.
  • The crime, real estate, and political examples are cited to show what is actually happening below the surface of assumptions.
  • The authors write "these theories made their way, seemingly without friction, from the experts' mouths to the journalists' ears to the public's mind," highlighting the tunnel through which seemingly expert information becomes conventional wisdom, an error that they will disprove over and over throughout the course of the book.
  • While people tend to want to view the world in moral terms and conditions, economics shows the way the world actually works because it can accurately measure and quantify data.
  • The benefit to learning how to apply economic theories and principles to different issues is that one can learn to disassociate morality and expert bias from the data being presented.
  • Fundamental ideas about economics are these:
    • Incentives are the main driver of human behavior.
    • People tend to believe conventional wisdom.
    • Events that happened long ago can significantly affect the future.
    • Experts use the information they have to take advantage of consumers.
    • Knowledge of variables and data can make the world easier to understand.
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