Freakonomics: A Rogue Economist Explores the Hidden Side of Everything

“Many people—including a fair number of his peers—might not recognize Levitt’s work as economics at all. But he has merely distilled the so-called dismal science to its most primal aim: explaining how people get what they want. Unlike most academics, he is unafraid of using personal observations and curiosities; he is also unafraid of anecdote and storytelling (although he is afraid of calculus). He is an intuitionist. He sifts through a pile of data to find a story that no one else has found. He figures a way to measure an effect that veteran economists had declared unmeasurable.” 

Much of the criticism of Freakonomics centers around the non-economic nature of a book on economics, but the authors anticipate this criticism and respond that economics isn’t limited to dry topics that have little appeal to the public at large. Levitt takes that idea one step further by developing research techniques that can tease out answers to questions no one else has thought to ask.

“[T]he modern world, despite a surfeit of obfuscation, complication, and downright deceit, is not impenetrable, is not unknowable, and—if the right questions are asked—is even more intriguing than we think. All it takes is a new way of looking.”

Pundits sometimes insist that their opinions are facts; politicians may bend the truth to inspire bias that supports their candidacies; researchers can be swayed by conventional beliefs within their specialties. Somewhere within this noise may lie answers to difficult social questions, and it’s the curious individual’s job to pursue those hidden gems of knowledge by asking questions, thinking hard about the data, and learning to separate the chaff of misinformation from the wheat of truth.

“Morality, it could be argued, represents the way that people would like the world to work—whereas economics represents how it actually does work.” 

People sometimes overlook the obvious, especially when big issues and strong feelings are involved. A careful look at the data, though, can reveal unexpected answers to common problems. Economics can unearth these surprises not just in matters of finance, jobs, and real estate, but also in everyday areas of concern like crime, education, politics, sports, and even family planning.

“The typical economist believes the world has not yet invented a problem that he cannot fix if given a free hand to design the proper incentive scheme.” 

Incentives are values that pull people toward or away from resources they want. A well-designed reward or penalty can get people to do more or less of a behavior, but such incentives aren’t always easy to find. Economists have the skills to tackle these challenges.

“Cheating is a primordial economic act: getting more for less. So it isn’t just the boldface names—inside-trading CEOs and pill-popping ballplayers and perk-abusing politicians—who cheat. It is the waitress who pockets her tips instead of pooling them. It is the Wal-Mart payroll manager who goes into the computer and shaves his employees’ hours to make his own performance look better. It is the third grader who, worried about not making it to the fourth grade, copies test answers from the kid sitting next to him.” 

Despite their best intentions, most people cheat now and then. It’s a universal trait, and economists and other designers of incentives must take it into account. To encourage better behavior, the student of human behavior must first understand why people act as they do, then consider possible ways people might be encouraged to behave in ways less irresponsible and more aligned with productive and cooperative activity.

“With high-stakes testing, a teacher whose students test poorly can be censured or passed over for a raise or promotion. If the entire school does poorly, federal funding can be withheld; if the school is put on probation, the teacher stands to be fired. High-stakes testing also presents teachers with some positive incentives. If her students do well enough, she might find herself praised, promoted, and even richer: the state of California at one point introduced bonuses of $25,000 for teachers who produced big test-score gains.” 

For a time, the struggle to improve student outcomes settled on increased testing. The purpose was to incentivize schools and teachers to find ways to improve their educational techniques; it also gave teachers a motive to cheat. Student answer sheets could be altered fairly easily, and soon a cat-and-mouse game between testing agencies and teachers was underway. The risks, it turned out, were high, and many teachers caught cheating were dismissed.

“One or two lynchings went a long way toward inducing docility among even a large group of people, for people respond strongly to strong incentives. And there are few incentives more powerful than the fear of random violence—which, in essence, is why terrorism is so effective.” 

The Ku Klux Klan sometimes punished African Americans by hanging those who refused to behave like second-class citizens. It took a mere handful of such murders each year to strike terror into the hearts of millions of Black Americans, particularly in the South. This is an example of the power of small groups to control much larger ones through the disincentive of intimidation.

“Information is a beacon, a cudgel, an olive branch, a deterrent—all depending on who wields it and how.” 

In a negotiation the power of information lies largely in who has it and who doesn’t. Whether it’s a secret organization that intimidates Black Americans, or a life insurance company that knows much more about pricing than its customers, or a used car dealer who knows exactly what a buyer’s trade-in is worth, their power rests on their information advantage. Strip that away and the price improves, or the threat subsides.

“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. Or that you are so befuddled by the complexity of their operation that you wouldn’t know what to do with the information if you had it. Or that you are so in awe of their expertise that you wouldn’t dare challenge them.” 

Experts rely on their information advantage to charge customers much more than they would if customers knew the whole truth. The authors examine the real estate industry, in which realtors operate in a way that ensures more income for them even if it’s to the financial disadvantage of their clients, to illustrate the point.

“An analysis of the language used in real-estate ads shows that certain words are powerfully correlated with the final sale price of a house. This doesn’t necessarily mean that labeling a house ‘well maintained’ causes it to sell for less than an equivalent house. It does, however, indicate that when a real-estate agent labels a house ‘well maintained,’ she may be subtly encouraging a buyer to bid low.” 

Real estate agents know that if they hold out for a better offer, their client might gain an extra $10,000, but the agent usually only earns an extra $150. It’s therefore in the agent’s financial interest to encourage quick bids so they can move on to the next sale; thus, they may signal to the marketplace that they’ll accept lower bids. But they mustn’t let the homeowner realize that they’re more interested in a quick killing, so they couch their ads in terms that comfort the seller while winking at the buyer.

“The gulf between the information we publicly proclaim and the information we know to be true is often vast. (Or, put a more familiar way: we say one thing and do another.) This can be seen in personal relationships, in commercial transactions, and of course in politics.” 

It’s hard to be honest if that gets you rejected, especially if everyone else is exaggerating about the same topic. Thus, for example, most people on dating sites overstate their height, income, looks, and open-mindedness.

“Every day there are newspaper pages and television newscasts to be filled, and an expert who can deliver a jarring piece of wisdom is always welcome. Working together, journalists and experts are the architects of much conventional wisdom.” 

The need to make the news exciting, coupled with activists’ need to awaken people to their causes, leads to popularization of exaggerations or outright falsehoods that become the accepted norm. Just because it’s in the news doesn’t make it true; a healthy skepticism about new and jarring information can prevent a lot of mistaken conclusions about the world.

“The problem with crack dealing is the same as in every other glamour profession: a lot of people are competing for a very few prizes. Earning big money in the crack gang wasn’t much more likely than the Wisconsin farm girl becoming a movie star or the high-school quarterback playing in the NFL. But criminals, like everyone else, respond to incentives. So if the prize is big enough, they will form a line down the block just hoping for a chance. On the south side of Chicago, people wanting to sell crack vastly outnumbered the available street corners.”

Even a bad job can look good to someone desperate to escape a worse economic situation. Most drug sellers never advance to higher-paying levels, and one-fourth of them die on the street in a four-year period, but to a desperate young man, the chance to hit it big is a huge incentive. This lucrative potential enticed many to crack gangs, and inner-city streets quickly became overcrowded with drug sellers, fights broke out, and a lot of those young men died.

“Black Americans were hurt more by crack cocaine than by any other single cause since Jim Crow.”

US African American communities, long depressed by prejudice, made great strides after World War II, as expanding factory work, better education, and improved healthcare made their lives more comparable to those of White Americans. The old Jim Crow laws, which limited Black civil liberties, particularly in the South, were repealed, only to be replaced in the 1980s by a downturn in manufacturing jobs and the sudden appearance of the cheap and addictive crack cocaine that trapped many in lives of crime.

“When the crime rate began falling in the early 1990s, it did so with such speed and suddenness that it surprised everyone […] it wouldn’t stop until the crime rate had fallen back to the levels of forty years earlier.” 

The 1990s crime drop had more to do with demographics than economics or policing. The expected wave of young criminals failed to appear; the usual explanations didn’t fit the data. It wasn’t until author Steven Levitt did a deep dive into the demographic information that we discovered the drop in crime was related to abortion laws that were liberalized 20 years earlier.

“Growing up in a single-parent home roughly doubles a child’s propensity to commit crime. So does having a teenage mother. Another study has shown that low maternal education is the single most powerful factor leading to criminality.”

A single parent must bear the entire load of child-rearing; a teenage mother on her own faces an almost insurmountable challenge in raising children, especially if she didn’t expect or want them. If her educational attainment is poor, she will likely be financially poor, which makes the situation even worse. Her kids, often neglected and undereducated, will be more likely to turn to crime to make ends meet as adults.

“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. What this cohort was missing, of course, were the children who stood the greatest chance of becoming criminals. And the crime rate continued to fall as an entire generation came of age minus the children whose mothers had not wanted to bring a child into the world. Legalized abortion led to less unwantedness; unwantedness leads to high crime; legalized abortion, therefore, led to less crime.” 

Despite predictions of a great crime wave to come in the 1990s, the rate fell instead. The young men of that time were the first in the US to grow up in a cohort with a substantially reduced number of unwanted children, who tend to have a high propensity for criminal behavior. Thus, it’s arguable that legalized abortions in the late 1970s and early 1980s contributed to a large drop in crime during the late 1990s.

“The basic reality […] is that the risks that scare people and the risks that kill people are very different.” 

The authors quote risk consultant Peter Sandman, who believes the public tends to be outraged about the wrong problems while underestimating the real dangers. Familiarity makes risky things, like swimming pools, look safe, while unfamiliarity increases fear about things that aren’t very dangerous, like airplanes.

“A regression analysis can demonstrate correlation, but it doesn’t prove cause. After all, there are several ways in which two variables can be correlated. X can cause Y; Y can cause X; or it may be that some other factor is causing both X and Y. A regression alone can’t tell you whether it snows because it’s cold, whether it’s cold because it snows, or if the two just happen to go together.” 

A regression analysis is a scientific technique designed to ferret out possible causes between variables in large data sets. A good analysis can find correlations, but it’s harder to go from there to proving that one variable in the data actually causes another variable to change. This is the ever-present challenge for researchers, especially social scientists—including economists—who can’t always design an experiment involving people but instead must collect whatever data they can about how people behave and study that data for signs of hidden connections.

“The data reveal that black children who perform poorly in school do so not because they are black but because a black child is more likely to come from a low-income, low-education household. A typical black child and white child from the same socioeconomic background, however, have the same abilities in math and reading upon entering kindergarten.” 

This discovery opens doors to possible solutions to the Black-White education and income gap. It also demonstrates that the gap is due to social, not genetic, factors. The bad news is that the gap widens as the child progresses through school; this is likely due to poor environment, including local gang activity and strangers who loiter at school gates, along with lack of PTA funding. At schools unaffected by these factors, a Black-White gap doesn’t open up.

“A DeShawn is more likely to have been handicapped by a low-income, low-education, single-parent background. His name is an indicator—not a cause—of his outcome.”

Distinctively Black names don’t limit a person’s chances for success, but the environment in which such names are common—low-income, low-education families and neighborhoods—do correlate with underachievement. Names suggest, but do not make, income and other gaps. Solutions to those problems lie elsewhere.

“[A]n 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.”

As with other parenting techniques, what’s important isn’t the name a child receives but the kind of parents they get. Good life outcomes for children tend to come from parents who are well educated, have higher status, and enjoy learning. A child’s name bespeaks their parents’ hopes and dreams, but the causes of that success come from the character of the parents.

“But if there is no unifying theme to Freakonomics, there is at least a common thread running through the everyday application of Freakonomics. It has to do with thinking sensibly about how people behave in the real world. All it requires is a novel way of looking, of discerning, of measuring. This isn’t necessarily a difficult task, nor does it require supersophisticated thinking. We have essentially tried to figure out what the typical gang member or sumo wrestler figured out on his own (although we had to do so in reverse).” 

The topics in Freakonomics vary widely, but the underlying “thread” is that we can better understand people’s behavior if we examine the data about those actions and think about it carefully, with open minds and a willingness to consider unconventional ideas about what makes people tick.