Economics

Why We Falsely Link Effects to Causes When two things happen together, it’s tempting to believe that one caused the other. For example, in the previous chapter, we saw that the economy improved while crime rates dropped. This seems like a satisfying explanation, until the data show the economy couldn’t have had a large effect. In reality, many correlated phenomena are correlated purely by chance. This gives rise to the well-known saying, “correlation does not imply causation.” (Shortform note: this underlies a lot of popular superstitions, like people who wear their “lucky hats” to baseball games because they think it

The Myth of the “Crack Millionaires” Let’s set the stage. The 1980’s were marked by a tide of rising crime in The United States. A great deal of the violence in the inner cities was driven by crack-cocaine. According to one study, crack accounted for a shocking 25 percent of homicides in New York City in 1988. It was in this context that the conventional wisdom of “crack millionaires” was born. The myth was largely propagated by police officers, criminologists, and others in the law enforcement community. They argued that dealers were making money hand-over-fist and living extravagant, luxurious lifestyles.

Natural Experiments and Economics Economics is not an easy field in which to conduct randomized controlled experiments. Since much of economics focuses on quantities that are very large (national GDP, effects of fiscal policy on employment) and involves the study of individual decisions made by billions of people, it’s rare for economists to be able to test their hypotheses in a lab. For this reason, economists must observe events in the real world that happen create “variable” and “control” groups that can substitute for the classical design of a laboratory experiment. These real world events are called natural experiments. Throughout

As the world has become more specialized and complex, people have come to rely more and more on experts to guide them through major life decisions. This is largely driven by fear of making a wrong decision that might result in financial ruin or even physical harm. As we’ve discussed above, however, experts are hardly neutral arbiters of truth who are selflessly devoted to guiding you through the trials and tribulations of a staggeringly complex world. Rather, they are often self-interested, equally fallible humans who seek to use their superior information to gain an advantage on you. This unequal distribution

The Early Childhood Longitudinal Study (ECLS), launched by the US. Department of Education in the 1990s, measured the academic progress of over 20,000 students as they progressed from kindergarten to the fifth grade, interviewing parents and educators and asking a broad range of questions about the children’s home environment. The study provided an ample resource of data that researchers could use to identify more statistically meaningful relationships between specific parenting tactics and children’s academic outcomes.

What Are Incentives? At their most basic, incentives are stimuli that encourage “good” behavior and discourage “bad” behavior. (Think of how you might give a dog a treat for sitting when she’s told to). As we’ll see throughout Freakonomics, incentives are a key driver of human behavior.