PDF Summary:Freakonomics, by Steven D. Levitt and Stephen J. Dubner

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Understand the incentives of experts, and you’ll understand how they can act against your best interest.

How Do We Find The Truth?

We apply the analytical, quantitative methods of economics. Economics has a powerful toolkit that can be used to solve problems far beyond predicting stock market trends or forecasting GDP.

We see this in the pervasive influence of false correlations. Experts are adept at dubiously linking correlations to causes—it’s one of the most common means by which they spread misleading conventional wisdom. For example, stock market pundits point to questionable causes of movements that might largely be random. Data-driven methods like regression analysis, however, can expose this weak logic and point us closer to the truth.

Does Money Really Buy Elections?

Consider the idea that “money buys elections.” Political scientists (and, perhaps more importantly, self-interested political fundraising consultants) tell us that the candidate who raises the most money wins the election the vast majority of the time. And on the surface, that’s true!

But does the cash really cause the candidate to win? Or is this merely a correlation...

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Example: Parents Late to Daycare Pickup

A day-care center requires parents to pick up their kids by 4PM. But inevitably some parents are late. This is costly—the kids are anxious, and the teachers have to stay late to watch the kids. How do you fix this with incentives?

Here’s a simple fix: fine a parent each time they’re late. Theoretically, this increases the punishment to a parent for being late, which should decrease late arrivals.

A pair of economists put this to the test a ta group of day-care centers in Israel. The rule: any parent over ten minutes late would pay $3 per child for each late arrival.

The result was counterintuitive—the number of late pickups doubled. This is odd, since adding an extra fine should decrease pickups! What happened?

It turns out that adding a fine changed the nature of the relationship. A social/moral incentive was converted into an economic incentive. Previously with no fine, parents were held to social standards to be on time (“if you’re a good parent and a thoughtful person, you’ll be on time”).

But when the day-care center added dollars to the mix, it changed the implicit agreement, making the calculation...

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Example: How the Ku Klux Klan Lost its Information Advantage

The Ku Klux Klan (KKK) is the most infamous domestic terrorist group in United States history. Through violence and intimidation against African-Americans, they were fearsome enforcers of the traditional racial hierarchy in the southern US.

You might remember that the Klan supported violent acts like lynchings to spread their message and intimidate African-Americans. But statistics show lynchings had fallen drastically by the 1920s, when Klan membership was at its peak. This suggests that something besides simple violence was at the root of the organization’s influence and power.

Their secret weapon was information. The Klan relied on its status as a secret organization, giving it a powerful mystique that enabled it to exert an influence far beyond its actual numerical strength. With its operations, rituals, and membership shrouded in mystery, the Klan appeared to be all-seeing, all-knowing, and ever-present. This information asymmetry between the Klan and what the rest of the country really knew about it was a major source of organizational strength.

When journalists Stetson Kennedy and John...

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An Economist Crunches the Numbers Behind Crack

So how was the false narrative about crack revealed? Through careful data analysis, this time by an enterprising graduate student at the University of Chicago named Sudhir Venkatesh.

In the early 1990s, Venkatesh decided to study the phenomenon of crack-cocaine by leaving his ivory tower and actually speaking directly with crack dealers in Chicago’s housing projects.

In the course of his work with the Black Disciples gang, Venkatesh gained access to the gang’s financial records. What Venkatesh saw in those records thoroughly refuted the prevailing wisdom.

Analyzing the gang’s financial records, he discovered that crack dealing was only lucrative for the highest levels of the gang leadership. The trade was organized along a highly structured, hierarchical business model:

1. At the top was a “Board of Directors” (yes, this was their actual title), the upper echelon of Black Disciples leadership, usually consisting of about 20 individuals at any given time.
2. Below that were regional leaders who paid the Board 20 percent of the revenues earned from crack sales, simply for the right to operate within a...

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Economic growth?

Some experts argued that the economy improved in the 1990s, leading fewer people into crime.

It is true that the great decline in crime coincided with the 1990s economic boom, but not enough. According to studies, a 1 percent drop in unemployment would be expected to be matched by a 1 percent drop in nonviolent, economically motivated crime.

Unemployment declined by only 2 percent during the 1990s, while nonviolent crime alone plummeted by 40 percent! The economy might contribute a bit, but not enough.

More incarceration/capital punishment?

The idea is that being “tougher on crime” in the 1990s dissuaded people from committing crimes.

It’s true that crime had flourished during a relatively lax period of criminal justice enforcement in the 1960s and 1970s. Conviction rates declined during this era, and those who were convicted tended to serve shorter sentences. If we think back to incentives, we’ll see that the cost of committing crime was relatively low, which encouraged criminal activity.

In response, the public began clamoring for “tough on crime” policies, first with putting more people in jail. **The national prison...

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So do parents need to worry as much as they do? Do our efforts as parents even make as much of a difference as we think they do?

Regression Analysis: Breaking Down the Correlation/Causation Fallacy

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.

Researchers used regression analysis to draw conclusions from this rich data set. Regression analysis enables researchers to isolate two variables in a complicated and messy set of data, holding everything else constant to identify relationships between variables. Its main benefit is that it allows analysts to control for confounding variables that might otherwise confuse the true causal relationship.

It is important to note that...

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Can People Be Harmed By Their Names? A Public Study Sheds Some Light

In 2004, an economist studied a massive trove of public data, published by the state of California, consisting of birth certificate information for every child born in the state since 1961. The dataset, which encompassed over 16 million births, contained invaluable information for each birth, including:

• Standard information like name, gender, race, and birthweight
• Parents’ marital status
• Economic status indicators like zip code, parents’ means of paying the hospital bill, and parents’ level of education

He used this natural experiment to explore whether or not having a distinctively “black” name had a negative impact on an individual’s life prospects. In other words, would naming your son DeShawn lower his life outcomes compared to naming him Connor, even if you changed nothing else? The point of the study was to unpack the socioeconomic disparity between blacks and whites—might black culture cause economic differences between races? In the case of names, having a blacker-sounding name might unfortunately cause more discrimination in job applications.

Given the impossibility and...

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With reduced demand for the product (younger people were turned off to it, having seen its ravaging effects among their elders), there has been a drop in price, as one would expect from laws of supply and demand.

The resulting decline in profit margins reduced the incentive for violence—it’s not worth the high costs and risks associated with killing a rival (or risking getting killed yourself) to gain marginal ground in a less and less profitable market.

“Does the Truth Lie Within? One Professor’s Lifetime of Self-Experimentation” (2005)

This article puts the Freakonomics lens on the self-experimentation of Seth Roberts, a sociology professor at the University of California at Berkeley. Self-experimentation is (as the name suggests) when an individual performs experiments on themselves. Aside from the personal risk associated with doing this, the practice is usually scorned by scientists, since:

• It removes objectivity
• It’s impossible to set up a control group or a double-blind experiment (since the subject and the researcher are the same person)
• It’s difficult to replicate

Nevertheless, Roberts wanted to experiment with how to lose weight. He realized...