🚀 The Book in 3 Sentences

1. All human behavior is based on one of three incentives: (1) economic, (2) moral, or (3) social.

2. Analyzing data mathematically, considering controversial ideas, and limiting the interference of political and moral preconceptions is the only way to see the world “as it is”

3. Irrational behavior & conventional wisdom can harm our interests, but economic thinking can combat this.

🎨 Impressions

Freakonomics is one of the most interesting books I have ever read. Dubner & Levitt clarify in the opening pages that the book has no overarching message. However, two guide readers through several unique cast studies—this in itself a masterclass on economic & first-principles thinking.

How I Discovered It

I was researching books to read to better understand economics and stumbled on this page.

Who Should Read It?

Freakonomics is a must-read for anyone who wants to improve their critical thinking skills and learn to question the conventional (and often incorrect) wisdom that puppeteers our daily lives. While the book is by no means a step-by-step guide, it exemplifies the types of questions one should constantly be asking oneself.

☘️ How the Book Changed Me

• In response to reading the book, I’ve started questioning “societal wisdom” and my heuristics.

• The book’s unique writing style is one that I have attempted to emulate in some essays.

• Freakonomics has changed my perspective on crime, parenting, and the principal-agent problem.

• The thinking demonstrated in Freakonomics can and should be reapplied to be skeptical of the book itself.

✍️ My Top 3 Quotes

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

• “The conventional wisdom is often wrong.”

• “An incentive is a bullet, a key: an often tiny object with astonishing power to change a situation.”

📒 Summary + Notes

General Comments

• 3 types of incentives: (1) economic, (2) moral, and (3) social
  
  • Economic: Monetary rewards or punishment
  • Moral: “Is it ethical or the right thing to do?”
  • Social: Praise or criticism from society and peers

Cheating

• An excellent example of the power of incentives
  
  • Teachers in the CPS are incentivized to help students cheat to be eligible for raises and promotions
  • Sumo wrestlers with 8-6 record have an incentive to accept bribes from wrestlers with a 7-7 record and throw the match due to the ranking system that depends on a positive record in tournaments
    
    • 7-7 wrestler beats 8-6 wrestler 80% of the time
    • If the same wrestlers compete after the tournament, the former “7-7” wrestler wins only 40%

Information Asymmetry

• Information asymmetry: One person/group has more information than another

• Experts will monopolize information to create fear and capitalize on the fear and ignorance
  
  • Real estate agents are incentivized to persuade clients to sell quickly, even if it’s for less
  • Parenting experts can attract an audience by inspiring unfounded fear

• Once secret information becomes public, the holder(s) of the secret information lose power as the information asymmetry is resolved
  
  • Stetson Kennedy circulated the KKK’s passwords and criticism of the organization
  • Life insurance policies became cheaper in the 90s as the internet enabled consumers to search for lower prices
  • Internet reduced asymmetry between real estate agents and sellers; therefore, the gap between the starting and final price of houses has also decreased

Defying Conventional Wisdom

Gangs

• Through primary research, PH.D candidate Venkatesh and Levitt find that gangs are organized like a franchise
  
  • Gang leaders pay 20% of revenue to a “board of directors”
  • After paying the gang’s employees, the gang leader receives an annual salary of $100,000
  • Gang employees make ~$3.30 per hour

• Many gang members “live with their mothers” for this reason, dispelling conventional wisdom that drug dealing is a profitable business for all members involved

• Just like capital enterprise, one has to be near the top to earn big wages, but people will accept the dangers, disadvantages, and risks of a gang employee for the unprobable opportunity to rise up

Crime Reduction in the 90s

• Popular explanations for the decrease in nationwide crime include (1) innovative policing strategies, (2) a stronger economy, (3) gun-control laws, (4) an aging of the population, (5) changes in the drug market, (6) an increased reliance on prisons, (7) increased numbers of police officers, & (8) all other explanations, e.g., capital-punishment and gun-buybacks.

• However, none of these are the actual explanation for the sudden and large reduction
  
  • Policing strategies were implemented after the drop
  • The stronger economy has no statistical correlation with the decline in crime rates
  • Gun control laws can not account for black markets
  • The aging population cannot account for a swift change in crime rates
  • Reasons 5, 6, & 7 did impact crime rates to a degree but don’t account for the magnitude
  • All other explanations were limited in scope and rare occurrences

• According to Dubner & Levitt, the legalization of abortion was the key cause
  
  • Abortions become common among negligent, work-class women, who would have been more statistically likely to give birth to children who would commit crimes in the future
  • The first cohort of children born after the ‘73 ruling, was reaching its 20s in the 90s
    
    • The crime rates decreased due to the absence of people likely to commit a crime

Parenting

• Bad parenting can adversely affect a child—an unwanted child is more likely to commit a crime

• DOE undertook a study of child development to analyze factors affecting academics
  
  • Parents’ education, parents’ socioeconomic status, age of the mother at birth, birthweight, whether English is spoken at home, whether the child is adopted, parents’ involvement in the PTA, and whether the child has books in their home were significant factors
  • Intactness of family, location of child’s home, whether the mother worked between birth and Kindergarten, whether the child attended HeadStart, whether the family regularly attended the musuem, whether the child is spanked, the regularity of the child’s television time, and whether the child is read to were insignificant factors

• Significant factors were characteristics of the parents, not their particular actions

• “The apple doesn’t fall far from the tree.”