Freakonomics | Study Guide

Steven D. Levitt & Stephen J. Dubner

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Freakonomics | Summary

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Introduction: The Hidden Side of Everything

The authors open the book with several controversial and unusual examples of how economics can explain things beyond its usual scope. They begin by pointing out the national rise in crime in the early 1990s, which many criminal experts predicted would increase. Instead crime plummeted, and the experts were quick to rush in with explanations for what happened—explanations that became conventional wisdom such as gun control laws and policing strategies. Yet the authors point to an event that occurred nearly 20 years earlier that they claim had the biggest impact in the drop in crime—the passing of Roe v. Wade, which legalized abortion. Because of this law, they claim, children who would have been born into difficult circumstances (children statistically more likely to commit crimes as teenagers) were never born, and therefore the crime rate plummeted around the time they would have become teenagers who would commit crimes.

Here the authors introduce the concept of incentives and how they influence the choices people make, even when the connections don't seem obvious. Two other fields with incentives and outcomes that don't necessarily line up with conventional wisdom are real estate and politics. Real estate agents, it turns out, have far more incentive to keep their own houses on the market longer than the houses they sell for their clients. In politics, conventional wisdom holds wealth helps a candidate more than anything else, but the amount a candidate spends on a campaign has little to do with whether or not the candidate wins.

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

The authors delve further into the effects of incentives—both good and bad. People are motivated by three kinds of incentives: social, economic, and moral. Often these incentives are combined, and sometimes in a way causing people to cheat if the stakes are right. The authors point out cheating is merely an economic act of getting more for less and therefore is inherent in most human endeavors. One area in which people aren't surprised about cheating is in schools, yet most people are surprised when teachers, not students, cheat. Such a case was studied in the instance of high-stakes testing in the Chicago Public School system. Because the stakes were so high for students not to do poorly—schools could lose their funding and teachers could lose their jobs—a number of teachers altered answers on their students' tests to make it look as though students performed better than they did.

Another arena known for cheating is sports. In sumo wrestling incentives have led to fixing matches so another wrestler can keep his ranking or enter the elite group. The last example in the discussion of incentives is the man who sold bagels on the honor system. Although some customers didn't pay, the majority did, thus supporting the authors' contention people tend to be more moral than not—especially when incentives to cheat are not compelling.

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

The authors investigate some of the incentives behind the Ku Klux Klan, as well as the moral incentives for disowning it that led to its decline. One dissenter worked from the inside to expose the Klan for its bigotry and demonstrate its threat as a terrorist organization. He made their passwords and secrets public knowledge, thus defeating its appeal as a secret organization. Americans who didn't know much about the Klan now had enough information to ridicule it and oppose it actively.

Other industries in which information became an incentive were the term life insurance industry, the auto industry, and the real estate market. The advent of the Internet has changed the information asymmetry since anyone can look up information previously unavailable or difficult to access. Online dating sites and political polls also show the disparate information people provide versus what they actually believe—proving people are motivated in these cases by moral incentives to present themselves a certain way.

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

Although conventional wisdom holds drug dealers make a lot of money to stay in such a risky business, one economist's close ties to a drug-dealing community show only those at the very top make enough money to do well. Those at the bottom of the pyramid make roughly the equivalent of a fast food job, but they stay because of the promise and allure of rising in the ranks.

In the 1980s, crack cocaine became a popular drug, and the business of dealing it boomed. The economist who studied one gang's finances and dealings found the gang ran its enterprise much like a franchise. As a branch inside a much larger organization, the gang gave a percentage of its earnings in exchange for the right to do business in their area. While the gang's leader made about $100,000 a year, most of the rank and file made what amounted to $7 or less an hour. Job conditions were frightening, with a one-in-four chance of being killed on the job. The work remained appealing in that it held the promise of promotion, but it had the same obstacles as any competitive industry. At the same time, the homicide rate among young urban blacks quadrupled. Experts predicted a rising crime wave of youth violence, but instead incidents of violent crime began to decline.

Chapter 4: Where Have All the Criminals Gone?

In Romania, a law making abortion illegal in 1966 incentivized the birth rate: within one year it had doubled. Yet life for these children was worse in every measurable way compared with the lives of children born just one year earlier. Nearly 20 years later, the dictator responsible for the law was overthrown by the generation he had largely brought into being.

This situation was the opposite of what was occurring in the United States at about the same time. As the United States experienced a dramatic drop in crime in the 1990s, experts struggled to explain it, grasping for conventional wisdom and answers close at hand. Yet the change had as much to do with abortion laws as the Romanian law had to do with its own burgeoning youth population. Abortion was declared legal in the United States in 1973, and by 1980 there were 1.6 million abortions per year. Women most likely to have abortions were poor, unmarried, and not well educated. These circumstances are the greatest contributing factors to children growing up to be criminals. Therefore, at the time this first generation of otherwise-born children would have become young adults, they hadn't actually been born. The decision to legalize abortion, the authors believe, led to less crime.

Chapter 5: What Makes a Perfect Parent?

An entire industry has been created around parenting experts, who often have conflicting advice. Many experts appeal to parents' fears about what they can and can't control when raising their child. Yet most parents believe conventional wisdom unsupported by data, such as the idea swimming pools are safer than guns. Studies and data indicate the extent to which parents actually matter when it comes to who their children become is less evident than commonly believed. Because personality traits are hard to quantify, examining school performance data yields some answers. One measuring stick is the gap between black and white students, which leads to an income gap between black and white adults. Although black and white students enter school with no gap, that gap begins to widen after a few years because of the prevalence of low-income, low-education households black students come from. Although parenting techniques do matter, many of the deciding factors in how successfully children do in school are decided before they are born because of who their parents are rather than how their parents raise them.

Chapter 6: Perfect Parenting, Part II; or: Would a Roshanda by Any Other Name Smell as Sweet?

One piece of parental conventional wisdom is determining a child's name helps determine the child's future. Indeed, an entire industry thrives on baby naming. Names are also deeply linked to culture—which means different cultures have different connections to names, as do black and white cultures. Economists have aimed to discover whether the things that make black culture unique are a cause of the economic gap between blacks and whites or merely a mirror of those differences. The black parents who give their children uniquely black names tend to be unmarried, low-earning teenage mothers who also have names that come from black culture. White parents, however, tend to give their babies more common names that reflect their class and economic standing. The association with each culture's names reflects their socioeconomic backgrounds.

Epilogue: Two Paths to Harvard

The authors have demonstrated through their examples a common thread about how people behave according to incentives in the real world. They also show how economics can explain situations that don't seem related to the field and can dismantle long-held erroneous beliefs.

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