Freakonomics

The Ku Klux Klan was founded shortly after the Civil War ended. The Klansman used terrorist methods—arson, intimidation, murder, etc.—to frighten newly emancipated slaves. The Klan also used pamphleteering to spread its ideas. But despite the Klansmen’s attempts to fight post-war Reconstruction in the South, the federal government continued to keep troops in the Southern states until 1876. After this time, the Klan died down until 1915, when the classic silent film The Birth of a Nation inspired the Klansmen’s rebirth.

In the 1920s, the Klansmen numbered at least 8 million. They held meetings across the country, criticizing blacks, Jews, Catholics, communists, unionists, and other so-called “degenerates.” During World War II, the Klansmen again died down. In the 50s and 60s, however, the Klansmen experienced another revival in Atlanta.

During the 1920s, a man named Stetson Kennedy was born in Atlanta. Kennedy belonged to a long line of Klansmen, dating all the way back to the Reconstruction era. Yet Kennedy himself was a fervent opponent of racism, and spent much of his adult life collecting the folk tales of African Americans in the South. Kennedy despised the bigotry of the Ku Klux Klan, and penned an exposé of the Klansmen’s history.

One way to study the history of the Ku Klux Klan is to look at the number of lynchings in the U.S. by decade. For years, the Klansmen would capture black men and murder them, often as “punishment” for crimes they hadn’t committed. Statistically, there’s been a marked decrease in lynchings in every decade since the 1890s. Another striking fact about lynchings in the U.S. is that, although even one lynching is too many, lynchings were never one of the primary causes of death for the black population in the United States. At the height of the Klansmen’s power, a few dozen black people were lynched every year—a surprisingly small number compared to the 10,000 black children who died of pneumonia and other diseases every year. So why, at the height of the Klansmen’s power, were relatively few black people lynched?

One hypothesis for the low number of lynchings each decade is that lynchings were intended to intimidate the black population. The Klansmen wanted to prevent black people from voting, riding the bus, etc.—and in order to scare the black population into submission, it would sometimes execute a black man. Perhaps a small number of lynchings were “effective” in frightening the black population into remaining docile and segregated.

To return to the life of Stetson Kennedy: after writing his book on the Klan, Kennedy became frustrated because he thought he’d done no real damage to the Klan. It occurred to Kennedy that he could do real, lasting damage to the Klan by passing on the Klansmen’s passwords to the public. Kennedy began passing Klan passwords along to radio stations. The plan worked, and news of the Klan’s cruelty and corruption spread across the country. Radio hosts across the country continued repeating Klan passwords, infuriating Klansmen. Kennedy is often credited with turning the public’s sympathy against the Ku Klux Klan, both by circulating the Klan’s passwords and by circulating criticism of the Klan. Kennedy understood that information is power—once secret information becomes public, the people who controlled the secret information lose much of their power.

Another example of the power of information: in the 1990s, life insurance policies became considerably cheaper. The reason for this change was the rise of the Internet. People could now search for a cheaper life insurance policy, whereas in the past, people would sometimes spend an unnecessarily large amount of money on a policy that could have been purchased for a lower price somewhere else. In general, the Internet helped to “shrink the gap” between experts and the public. With the help of online searches, ordinary people could find information on their own instead of trusting in so-called experts (who would often give them the wrong information, anyway).

Economists call the difference between the knowledge of two parties “information asymmetry.” The world of finance is full of examples of information asymmetry—for instance, during the Enron scandal of the early 2000s, Enron executives lied to their stockholders and customers by saying that the company was far more financially healthy than it really was, and the asymmetry benefitted Enron executives and hurt stockholders. Enron executives passed themselves off as “experts” in their own business, and promoted false information. Furthermore, Enron executives were trying to keep information as asymmetrical as possible: they wanted to keep stockholders in the dark about the realities of the company.

In many different walks of life, so-called experts use their monopoly or near-monopoly in information to help themselves and potentially hurt their customers and clients. Experts claim that the information they guard is too complicated or confusing to be revealed to the public; then, they use the public’s ignorance to create fear. For example, an insurance salesman with a near-monopoly on information about the prevalence of heart attacks could create fear in the minds of his customers, and sell lots of overpriced life insurance policies.

Consider a textbook example of information asymmetry: selling a house. When a person sells a house, there are two major dangers: 1) setting the price too low and 2) setting the price too high. The job of a real estate agent is to find the “golden mean” between 1) and 2). But, as we saw in the Introduction to this book, real estate agents don’t always have their client’s best interests in mind: indeed, their monopoly on information about the real estate market may encourage them to sell a house for too cheap.

The authors of the book recall a close friend, “K.” K. wanted to buy a house for 450,000 dollars. K. phoned the seller’s agent and asked the agent to name the lowest price the homeowner might accept. The agent scolded K. for asking such an unethical question. But then, the agent said, “My client is willing to sell this house for a lot less than you might think.” After the conversation, K. offered 425,000 dollars for the house. So because of his own real estate agent’s actions, the seller of the house lost 20,000 dollars. Meanwhile, the agent himself lost only 300 dollars (his “cut” of the commission on the house).

The job of a real estate agent, in a nutshell, is to persuade clients to sell their houses for less than they might like, while also letting potential buyers know that they should bid low. Real estate agents have many subtle ways of relaying information to potential buyers. For example, listing a house as “well-maintained” might sound like a good thing to the seller of the house. But in reality, the phrase is “real estate code” for a house that’s old but not quite falling down. Secret phrases like “well-maintained” function in the same way as passwords for the Ku Klux Klan: they convey a secret message in addition to the explicit meaning of the phrase itself.

Statistics show that there are many real estate terms associated with a higher or lower final sale price. While it’s difficult to show causation between use of these phrases and final price, it’s clear that the phrases are intended to convey a secret message. One could say that real estate agents are “bad” people for using coded language and sometimes taking money out of their own clients’ pockets. But such a question is also “hard for us to say.” Real estate agents have strong economic incentives to behave a certain way: the question of whether they’re good or bad for behaving this way is beyond the scope of economics itself.

In the age of the Internet, the power of real estate agents has decreased dramatically. People selling their homes can go online and find their own information about the price of houses. They can also look up some of the more overused real estate “code words.” Since the emergence of the Internet, the gap between a homeowner’s “starting price” and the final price has decreased by a third, a sign that the information gap between seller, buyer, and real estate agent has decreased as well.

We all exploit information asymmetry, whether we’re “experts” or not. On dates, or in job interviews, people try to project an image of themselves that isn’t always entirely accurate.

Another interesting case study of bigotry was the TV show The Weakest Link. On this show, a group of contestants had to answer trivia questions. After each round, the contestants would vote off one member of their own group. In theory, the only factor that should matter in voting off a member is the member’s ability to answer trivia questions. But in fact, studies suggest that age, gender, and race are all factors in voting.

It’s important, when discussing the potential bigotry of The Weakest Link, to keep in mind that the show is being filmed on a camera and watched by millions of people. So perhaps this explains why, overall, there doesn’t seem to be a strong bias against black or female contestants: the contestants’ awareness of the prevalence of discrimination against women and black people causes them to be careful not to discriminate against these two groups on camera. However, it would seem that Latino and elderly contestants are often discriminated against. In particular, Latinos suffer from “information-based discrimination”—other contestants seem to believe that the Latino contestants’ trivia abilities are lower than they really are, meaning that a disproportionate number of Latinos are eliminated in the first half of the game. On the other hand, elderly contestants are the victims of “taste-based discrimination”—i.e., other contestants don’t want to be around elderly people, meaning that a disproportionate number of elderly people are eliminated in the second half of the game.

Dating websites have become hugely popular in the United States. People share information about themselves with complete strangers. Economists have tried to measure how honest people are when they post “ads” for themselves on dating websites: do they lie about their weight, their height, their jobs, etc.? Indeed, studies have found that a disproportionate number of people on dating websites claim to earn more than 200,000 dollars per year—suggesting that a significant portion of online daters lie or exaggerate their incomes. Similarly, a disproportionate number of women on dating websites claim to be blonde. Economists have identified many other notable trends for online dating. Men who say they want short-term relationships do worse than men who say they want long-term relationships; but for women, these figures are reversed.

One of the most interesting trends for online dating was racial preference. On most dating sites, people are given the option of specifying races they prefer or avoid. But the fact that this information is public suggests that many people using online dating will conceal their actual preferences and instead say, “it doesn’t matter.” But in practice, the vast majority of people using online dating meet people within their racial group. Studies estimate than an Asian man will receive a quarter of responses from white women that an equally handsome, rich, and well educated white man would receive.

There is, in short, a major gap between the information we give in public and the information we secretly know to be true. In the 1989 New York mayoral race between Rudolph Giuliani (a white man) and David Dinkins (a black man), Dinkins won by a few percentage points. Surprisingly, exit polls showed Dinkins winning by a full 15 points. This would suggest that some New Yorkers who had voted for Giuliani didn’t want to be thought of as racially prejudiced, and falsely claimed to have voted for Dinkins.

David Duke, the infamous leader of the Ku Klux Klan, ran for public office on several occasions, but never succeeded. Duke compiled a mailing list of thousands of Klansmen, hoping that his “base” would propel him to the governorship of Louisiana. When Duke failed to become governor, he sold his mailing list to the governor of Louisiana for 150,000 dollars. In public, or around Klansmen, Duke tried to project an image of trustworthiness and integrity. But in fact, Duke was a corrupt politician who “sold votes” to pay for his gambling habit.