Originally published at: https://blog.12min.com/freakonomics-summary-steven-levitt/
Freakonomics: A Rogue Economist Explores the Hidden Side of Everything by Steven D. Levitt and Stephen J. DubnerIs a gun more dangerous than a swimming pool? How much of an impact do parents really have on a child's life? Did the legalization of abortion lead to a sharp decrease in crime?
These aren’t typical questions about economics, but then Steven Levitt isn’t your typical economist.
Together with award-winning writer and journalist Stephen Dubner, Levitt wrote Freakonomics as a way to explore the hidden side of everything from gangs and real-estate agents to cheating and the Ku Klux Klan.
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This is not a book about economics. Rather, it’s a book that applies economic theories to other subjects. And the conclusions Levitt and Dubner come to may surprise you. Freakonomics, in its own words, turns “conventional wisdom on its head”.
INCENTIVES / FREAKONOMICS
“Information is a beacon, a cudgel, an olive branch, a deterrent—all depending on who wields it and how.”
Levitt and Dubner argue that morality represents the way we would like the world to work, and economics shows how it actually works.
They explore subjects that may, at times, seem strange (it’s not called Freakonomics for nothing) to redefine the way we look at our world.
From a chapter on why the socioeconomic and racial status of parents affects how they name their children, to why parenting skills are overrated or why drug dealers have a tendency to live with their mothers, it’s a fun and interesting – and sometimes controversial – read.
At its heart, Freakonomics is a study of incentives – how people get what they want (or need) even when others want the same thing. And what Levitt and Dubner show above all is the importance of asking creative questions.
It’s what made Freakonomics an instant bestseller, and why the sometimes-controversial conclusions its authors draw are still debated today.
Check out our favorite nuggets from Freakonomics below!
"Freakonomics Summary"Freakonomics is a collaboration of authors Steven Levitt and Stephen J. Dubner, journalists and winners of numerous awards. The authors seek to find simple answers to complicated world problems.
Freakonomics tries to decipher everyday events from an economic perspective by exploring various events, such as drug dealers lives, the truth about real estate brokers, and the influence of parenting on children’s future.
Authors Levitt and Dubner present the economics of daily life telling different stories with irony.
The authors show, through the study of incentives, how the economy influences how individuals get what they want.
They also explore the secret side of things and, also, question the validity of modern wisdom, presenting a valuable and different perspective, using concrete data.
Freakonomics offers an unconventional premise: if morality shows how the world should work, economics shows how it actually works.
Freakonomics will redefine how you see the modern world and make you question various widely held assumptions. Why do people cheat?
Does your name influence your success? How does legalizing abortion influence a country’s crime rate?
This book seeks to bring the answers to these questions in a way never before seen, helping you to think about other issues from another perspective.
Understand The Power of IncentivesPeople cheat all the time, even those who say they don't cheat. People of all cultures and all kinds, who are usually honest, will resort to cheating to advance their careers or make more money if the incentive to cheat is great.
Apparently silly things, such as skip a line or stealing a point in a volleyball game, for example, may be recurring if the incentives work in favor of cheating.
Economists believe in the power of incentives. In fact, economics bases itself on the study of incentives.
An incentive is anything that induces a person to do a task or take action. Economists believe that all economic problems can be solved through these incentives.
But they will also tell you that the solution may not please everyone. For example, a standard solution to illegal street parking is to give traffic tickets.
These traffic tickets are not at all popular, but they solve the problem by giving drivers an incentive not to park illegally. So an incentive can exist in many ways, not all of them positive.
However, just as right encouragement can force individuals to obey the rules, the wrong incentive can encourage them to cheat. For example, in the United States, standardized school exams have become a common practice in public schools.
With the goal of promoting better education, the No Child Left Behind rewards schools that improve their test scores and penalizes those with failing scores.
Because there is a tangible benefit in achieving good test scores and (perhaps even more importantly) a distinct disadvantage in having poor results, there is a great incentive for teachers to cheat.
Some teachers may feel tempted to substitute the wrong answers for their students’ right answers, and thus their schools perform better.
The incentive to have good results and avoid bad ones can overcome the fear of doing something wrong or the risk of being caught.
Examine What Popular Wisdom SaysWhen you imagine a drug dealer, you may think of an armed person who has access to a significant amount of money. If they have that kind of money, then why do most traffickers still live with their mother?
You only believe that drug dealers live dangerous lives surrounded by money because you have absorbed this information from popular wisdom.
Traditional wisdom is usually a belief, opinion or judgment about an individual issue, already accepted by society.
The problem is that once knowledge is recognized as popular wisdom, it is tough to correct it, even if its premise is false.
Traditional wisdom is usually introduced by leading thinkers or experts in a particular industry, but these experts often make their observations and assumptions without ever checking the facts.
These conclusions, then, are passed on to other specialists, who lend authority to the argument.
The answer to why a typical drug dealer still lives with his mother was discovered by Sudhir Venkatesh, who spent six years with a gang in Chicago, studying their habits.
He found that the reason most drug dealers still lived with their mothers was simply that they did not make enough money.
The crack cocaine trader in the gang studied by Venkatesh earned only $ 3.30 per hour, which is insufficient for his livelihood.
So why do they continue in this challenging and dangerous work? The answer is not financial.
Drug gangs are like businesses: they have a pyramid-like organizational format, based on a hierarchy.
People in the base of the pyramid (the street workers) have the difficult task of selling drugs and participating in gang wars, hoping that one day they will climb to the top of the pyramid, where there are big rewards.
So the reality is that, contrary to popular belief, drug dealers do not make much money. That shows that what most people believe to be the truth may not always be the case.
Understanding The Decline In CriminalityCrime in the U.S.A. has dropped significantly in the 1990s. Several factors are associated with this decline, including an increase in the number of police officers, an increase in penalties for criminals and a change in the drug market.
But what about abortion? Could legalizing abortion be a contributing factor to this decline?
Nicolae Ceausescu became a dictator in Romania in 1966. A year later, he made abortion illegal. He thought it could make Romania stronger by increasing the population of the country.
The only women who were allowed to abort were those who already had four children and those in a high position in the Communist Party.
The pressure on women was so intense that government officials forced them to take pregnancy tests on the job. Women who did not get pregnant were forced to pay a celibacy tax.
Within a year, the birth rate in Romania doubled. Under the dictatorial regime of Nicolae Ceausescu, ordinary people of Romania lived a miserable life.
However, the consequences were worse for children born after the abortion ban: they were worse off than those born a year earlier, including their schooling achievements and their success at work.
After abortion became illegal in Romania, more children were born in poverty and were, therefore, more likely to engage in criminal activity.
If the ban on abortion can lead to increased crime, it is not difficult to apply the same logic to explain why crime is declining in the United States.
It may be that there are fewer unwanted children. Women in the US have access to abortion, children who are born have better prospects in life and are less likely to engage in crime for economic reasons.
Privileged Information Ca Be AdvantageousReal estate brokers make a lot of money at the expense of asymmetric informational. They need to use insider information to convince their customers to buy or sell real estate. Consider for a moment that you want to sell your home.
Selling a home is not a routine transaction, and you may not know much about the real estate market. One of your biggest problems will be the price of the house.
If you assign a meager price on your home, you may not get the money you deserve. But if your price is too high, your home may not be sold. So, what do you do?
In this scenario, your best option is to contact a broker. Before the emergence of the Internet, they were the only ones who had information on the real estate market.
They were in a good position to advise you on the home’s current market value.
However, they could also manipulate this information in their favor, to make their customers afraid of losing a good sale if they delayed.
Nowadays, thanks to the Internet, buyers and sellers can quickly research the market.
They have become clients with much more knowledge, and the result is that the broker’s advantage has diminished considerably.
In the same way, life insurance companies made a lot of money before the arrival of the Internet. In the past, customers had no way of knowing if the companies were offering the best prices or the best policies.
Therefore, the cost of life insurance was very high. When the Internet began offering comparisons between plans, customers were able to find cheaper policies quickly.
That has increased competition among insurance companies, which has caused prices to fall.
We see then that the power and influence of insurance companies or real estate companies depend on exclusive information. When exclusivity no longer exists, their power reduces or disappears.
Compare the story of two children. One is a white boy and the other a black kid. The white boy's parents have high school degrees, and the father has a good job.
His mother is a housewife and holds a university degree. The boy lives a happy life and does well in high school.
The black boy’s mother abandoned him when he was two. His father has a good job in retail, but he drinks a lot and often hits the kid when he’s drunk. One day the boy sees his father beating a woman.
She is beaten so badly that she loses some of her teeth. The kid does not do well in high school, starts selling drugs and gets in trouble often.
He makes sure to be in his bed before his father comes home from work and leaves the house before his father wakes up in the morning.
Eventually, his father is arrested for sexual assault. At twelve, the boy needs to support himself.
What do you think will happen to these two boys? How will their future be? Children of successful, educated, and healthy parents do better in school.
It does not matter if the child was taken to museums, was given timeout when he did something wrong or if he had a television.
That does not mean that parenting is not important, but the fact is that when parents finally learn what is right for their children, it is too late.
How your child will do in the future depends on factors decided many years before, such as your identity, the person you marry, and the kind of life you have.
Smart, educated, hard-working, well-paid individuals who marry such people are also more likely to have successful children. Being honest, kind and curious, also helps. For your kids to succeed, it does not depend so much on what you do when you are a parent, but on who you are.
Success Does Not Depend On Your NameIn 1958, a New York resident named Robert Lane had a son. He decided to call his son "Winner" (Winner). Three years later, he had another child and called him "Loser" (Loser). What do you think happened to the boys?
Loser Lane has achieved success in his life. He attended a preparatory school with a scholarship, went to Pennsylvania’s Lafayette University and later joined the New York police force. He was promoted to detective and eventually to sergeant.
His older brother, Winner, also stood out, but in the wrong way. The only thing he got was a long criminal record.
So the question arises: does a child’s name influence their eventual economic success? The answer is “no.”
A child’s name does not affect how they will perform in the future. Parents want to believe that they are making a difference in the lives of their children.
Otherwise, why bother raising your kids the right way? And it is true that most parents will name their kids thinking about the success they will achieve in the future.
Note that there is also a random effect that influences both the best and the worst parents.
As a result, there are devout and intelligent parents who have children who are unsuccessful, just as there are successful children regardless of their parents’ terrible habits and intentions (such as naming their child “Loser”).
To demonstrate this, let’s go back a bit. Do you remember the two boys from the previous session? These kids had very different beginnings in life.
The black boy is Roland G. Fryer Jr, a famous economist, while the white boy is Ted Kaczynski, the serial killer known as “Unabomber.” Looking at their education, we certainly would not have foreseen it.
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“Freakonomics” Quotes[bctt tweet="Information is a beacon, a cudgel, an olive branch, a deterrent--all depending on who wields it and how." username="get12min"]
[bctt tweet=“After all, your chances of winning a lottery and of affecting an election are pretty similar. From a financial perspective, playing the lottery is a bad investment. But it’s fun and relatively cheap: for the price of a ticket, you buy the right to fantasize how you’d spend the winnings - much as you get to fantasize that your vote will have some impact on policy.” username=“get12min”]
[bctt tweet=“If you both own a gun and a swimming pool in your backyard, the swimming pool is about 100 times more likely to kill a child than the gun is.” username=“get12min”]
[bctt tweet=“Levitt admits to having the reading interests of a tweener girl, the Twilight series and Harry Potter in particular.” username=“get12min”]
[bctt tweet=“As we suggested near the beginning of this book, if morality represents an ideal world, then economics represents the actual world.” username=“get12min”]
Final Notes:Freakonomics questions common principles and brings unusual answers. It has been proved, for example, that teachers cheat when incentives outweigh the risks of being caught.
Before the Internet arrived, insurance companies and real estate brokers were both very successful because they had privileged information.
Contrary to popular belief, drug dealers do not make a lot of money and live miserable lives.
The right to an abortion caused crime to fall because mothers had the choice of whether or not to have a baby and children were born with better standards of living.
When it comes to parenting, it is more important who the parents are than what they do.
Levitt and Dubner have shown that data is relevant, that incentives guide modern society and that collective wisdom may not have any basis at all.
They also argue that economic principles can be applied to everyday problems. Freakonomics features several pearls of wisdom, providing a new insight and understanding of everyday problems.
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