Freakonomics

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The book takes the form of six chapters. In each chapter, the authors analyze a different social issue from an economic perspective.

The first (and longest) chapter focuses on the role of incentives in human behavior. The authors argue that humans usually make decisions based on the incentives for their actions. These incentives fall into three general categories: economic incentives, moral incentives (i.e., doing the “right thing”), and social incentives (i.e., being praised or criticized by one’s peers).

One of the best ways to understand how incentives work is to analyze cheating in different walks of life. In the Chicago Public School system, there are annual standardized tests. The results of these tests—which all public school students must take—dictate whether or not the students’ teachers get raises and promotions, and whether or not the students will be accepted into certain classes. There is an obvious economic incentive for teachers to cheat on the results of standardized tests, and in certain years, about five percent of teachers did cheat. Another case of cheating is sumo wrestling. In 15-round sumo tournaments, one’s overall standing in the wrestling world is dependent on getting a positive record (i..e, winning at least 8 matches). Studies have found that an unusually high number of sumo wrestlers with a 7-7 record will defeat opponents with an 8-6 record. This is probably because the 8-6 wrestler has been bribed to throw the round, ensuring that both wrestlers end the tournament with a positive record. A final instance of cheating is the career of a man named Paul Feldman. Feldman has made a comfortable living by traveling to different businesses and bringing them bagels. Feldman asks company employees to leave a dollar for every bagel they eat. Surprisingly, Feldman rarely has major problems with such an “honor system”—almost everyone pays for their bagels instead of stealing them.

In the second chapter, the authors look at the history of the Ku Klux Klan. For more than a hundred years, the Ku Klux Klan was a powerful opponent of racial equality in the American South. The Klan is also a classic example of information asymmetry: i.e., the situation in which one person or group has more information than another person or group. The Klansmen controlled lots of private information: they had lots of passwords and secret handshakes, for instance. In much the same way, real estate agents have a secret language of “code words,” which they can use to communicate with one another. Real estate agents, one might think, have an incentive to sell clients’ houses for as much money as possible. But in reality, real estate agents’ main incentive is to sell more houses, quickly—therefore, they’ll sometimes intentionally sell a house for a cheaper price to “speed things along.” There are many other examples of asymmetric information: for example, most people will fudge the details about themselves when they’re on a date or in a job interview.

In the third chapter, the authors examine the history of the crack epidemic in the United States. Economically speaking, drug gangs selling crack aren’t all that different from a McDonald’s franchise. The crack business, just like any other competitive business in America, is attractive to people because of its potential rewards. In Chicago, researchers met a drug dealer named J.T., who made more than 100,000 dollars per year as the head of his “franchise” of the Black Disciples, a crack-selling gang. J.T. employed dozens of “foot soldiers,” who were responsible for selling crack on Chicago’s South Side. Even though foot soldiers had a one in four chance of being murdered, they continued to work for J.T., and when they were killed, J.T. had no trouble finding eager replacements. Not unlike aspiring actors moving to Hollywood, foot soldiers were willing to risk their lives in the hopes that they could “climb the ladder” and become rich and powerful. The chapter also details some of the history of the crack epidemic in the United States. In the 1970s, cocaine became a highly popular drug in the U.S. Because most people couldn’t afford real cocaine, they turned to a cheaper alternative, crack cocaine. Crack became so widespread that gangs made small fortunes by selling it. However, the bulk of this money went to a small number of leaders of drug gangs—the foot soldiers assumed almost all of the risk, in return for exceptionally small cuts of the profits.

The discussion of American crime continues in the fourth chapter, which is about the remarkable decline in crime in the 1990s. In this chapter, the authors discuss eight hypotheses for why crime rates went down so dramatically in the mid-90s. Popular theories for the decline include new policing strategies, capital punishment, and new gun-control laws. But the authors refute these explanations, showing how they don’t line up with the data. The primary causes of the declining crime rates include increased incarceration rates, a growing number of police officers, and—perhaps most important of all—the influence of abortions. Following the 1973 Supreme Court case, Roe v. Wade, abortions became legal in the United States. As a result, after 1973, many women in impoverished communities had abortions where they would otherwise have had unwanted children. Since unwanted children have an unusually high probability of growing up to become criminals, Roe v. Wade may have drastically decreased the number of children who grow up to commit crimes—an effect that didn’t become clear until the mid-90s, as the post-Roe v. Wade generation entered its twenties.

The fifth chapter examines the influence of parents on their children, and tries to understand whether nature or nurture is more important to a child’s development. Various studies suggest that at least half of a parent’s influence on a child is genetic in nature. There have even been studies of school systems that suggest that the high school a student attends makes little difference to that student’s academic success—a statement that would shock many educators. The authors analyze 16 different factors that are hypothesized to play a role in a child’s development. Overall, the authors find that parenting methods that entail specific actions (such as taking one’s child to museums, spanking the child, reading to the child every night, etc.) play little to no role in the child’s development, whereas there are many parental qualities (such as the parents’ level of education, their age at the time of having children, etc.) that have a demonstrable influence on a child’s development. Such data might suggest that genetics plays a larger role in a child’s development than parental nurture does.

In the sixth chapter, the authors study the influence of a child’s name on his or her development. It’s clear that names can prejudice people in measurable ways. For instance, one study showed that a hypothetical candidate named “DeShawn Williams”—a stereotypically black name—was considerably less likely to get job interviews than another hypothetical candidate named “Jake Williams,” even when both candidates had exactly the same resume. Statistical analyses of naming trends suggest some surprising results. First, in the last 30 years it’s become increasingly common for people in the black community to give their names distinctively black names—in other words, names not likely be found outside the black community. This trend reverses the trend found in the black community before the 1980s, perhaps suggesting increased racial solidarity and black pride. Another significant trend is that common names tend to “trickle” down from the upper classes to the working classes. Many names that were popular among upper-class families 40 years ago have now become most popular in working-class families. One can even predict, with a fair degree of accuracy, what baby names will be most common in 20 years by studying which baby names are currently the most popular among upper-class families.

In the epilogue, the authors make the important point that statistical analyses of “child development,” “economic success,” and other material measures are often insufficient for understanding how people really behave. To illustrate this, they look at two children—the first child grew up in an impoverished black community and had an abusive father; the second child grew up in an upper-class white community and had loving parents. On paper—that is, economically speaking—the second child appeared to be headed for greater “life success” than the first child. But the first child, Roland Fryer, grew up to be a brilliant Harvard economist and, by anyone’s reckoning, a highly “successful” man. The second child, Ted Kaczynski, grew up to be the Unabomber.