Steven Levitt's economic analysis of cheating and hidden incentives

Accounting - Economics

Freakonomics

An Explanatory Note

This short chapter introduces the two authors of the book, Steven D. Levitt, and award-winning economist, and Stephen J. Dubner, a writer and journalist who profiled Levitt. The chapter shows how the two men met and how Levitt's thinking is so different from most economists - he looks at items other economists would never think of looking at.

What do Schoolteachers and Sumo Wrestlers Have in Common?

Levitt maintains economists love incentives and believe incentives can fix just about any problem. He lists many incentives we respond to during life, that incentives urge people to do the right thing rather than the wrong thing, and that someone has to invent incentives. He also maintains incentives must be appropriate to be effective. He also maintains that just about everyone cheats - it is just a matter of the stakes and incentives. Many people spend their time thinking of ways to beat the system, rationalizing it as "getting more for less." He discusses how this relates to education and high-stakes testing, and how it might influence teachers to cheat to gain bonuses and save their jobs. Economists identified patterns that might indicate a teacher was changing answers in a classroom, and discovered that some teachers in the Chicago Public Schools were cheating by erasing students answers and filling in the correct answers. He relates this cheating to Japanese sumo wrestlers, who he maintains also cheat. He shows why they might cheat, and offers some ways to measure data to prove they cheat, and cites information from former sumo wrestlers who said some matches were rigged. Then he discusses the honor system as it relates to bagels and white collar crime, noting that office workers cheat, do not pay for bagels, and that larger offices are worse than small ones. He shows the honor-system does work, at least about 87% of the time.

How is the Ku Klux Klan Like a Group of Real Estate Agents?

Levitt gives a short history of the Ku Klux Klan, and an undercover man who joined the Klan to makes its terrorist and bigoted activities public. He maintains the Klan gained power because of its secrecy, and divulging information robbed it of power. He likens this dissemination of information to the Internet, which reduced life insurance premiums as soon as people were able to shop for insurance and compare prices online. He likens secret information to fear, and notes that experts often use that fear as effectively as the KKK to instill fear in people so they will buy products and services. He uses a real estate agent as an example, because most people defer to an agent to sell a house, because they are not experts, and agents play into this by making people think they will make mistakes if they do not use a professional. He also says that it is common to exaggerate information in anything from house ads to resumes.

Why do Drug Dealers Still Live With Their Moms?

This chapter deals with conventional wisdom and when to question it, such as the idea that all drug dealers are wealthy, when if fact, many still live at home. The premise of this chapter is on how to find the right data to prove or disprove a theory, and how difficult that can be. To answer this question, Levitt found a researcher who had spent a long period of time with a black gang in Chicago, and learned how to ask the right questions to generate data about the gang. He finally showed that most gang drug dealing is only profitable for a very few upper echelon gang members, and most make little from their efforts.

Where Have all the Criminals Gone?

Levitt maintains that higher prison populations have helped deter crime, and that other things, like policing, gun control, and the economy and unemployment have not. He uses the theory that legalized abortion in 1973 actually caused the crime rate to go down, and cites Romania as an example, who outlawed abortion in 1966. Studies show that women denied abortions in Romania were less likely to provide a good home for the unwanted child, and the same could be said for women in America. More wanted babies were born, and the crime rate went down.

What Makes a Perfect Parent?

Levitt notes that parenting is difficult, and that parenting advice is often contradictory and confusing. He maintains that parenting experts, like others, instill fear in parents to gain their own self-serving incentives. Parents, operating out of fear for their children and being good parents, are not always the best risk assessors, and they rely on information that can be confusing at best, often provided by marketers and experts who hope to gain from the information and products they offer. Again, he researches the right data to find out what influences children, and discovers school choice does not matter, traditional family does not matter, neighborhood, and both parents working does not matter, and more. What matters is the background and educational level of the parents, and other qualities that most low-income children do not enjoy. Parenting matters, but so do socio-economic influences.

Perfect Parenting Part II: Or Would a Roshanda by Any Other Name Smell as Sweet?

Next, Levitt tackles names, particularly ethnic names that may put a child at a disadvantage. He says blacks and whites tend to name their children differently, and that often these different black names are not understood by the parents. In fact, some of the unusual black names seem not to be accepted in society, and may actually hinder the child's career choices in the future. In fact, Levitt maintains these names show how the parents view themselves and the opportunities open to their children. Again, education and income level are strongly related, and the more money a person makes, black or white, the more common and "normal" their children's names will be. He uses tables and charts to show popular white and black names, and speculate on what they will be in the future. Names may not make a difference in life, but the odder the name; the more the parent may be influencing how successful their child is by placing their own expectations on the child.

Epilogue: Two Paths to Harvard

Finally, the author discusses thinking "sensibly" about real people in the real world. He urges skepticism with accepted wisdom, and looking underneath a layer of society to discover the truth.