Freakonomics by Levitt
Ref: Steven Levitt (2005). Freakonomics: A Rogue Economist Explores the Hidden Side of Everything. Harper Collins Press.
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Summary
Which is more dangerous, a gun or a swimming pool? What do schoolteachers and sumo wrestlers have in common? Why do drug dealers still live with their moms? How much do parents really matter? What kind of impact did Roe v. Wade have on violent crime? What unites all these stories is a belief that the modern world, despite a surfeit of obfuscation, complication, and downright deceit, is not impenetrable, is not unknowable, and -- if the right questions are asked -- is even more intriguing than we think. All it takes is a new way of looking (goodreads).
If morality represents how we would like the world to work, then economics represents how it actually does work.
Information is a beacon, a cudgel, an olive branch, a deterrent—all depending on who wields it and how. Information is so powerful that the assumption of information, even if the information does not actually exist, can have a sobering effect.
Knowing what to measure and how to measure it makes a complicated world much less so.
There are three basic flavours of incentive: economic, social and moral.
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Economics
Since the science of economics is primarily a set of tools, as opposed to a subject matter, then no subject, however offbeat, need be beyond its reach.
An Immutable Law of Labor- When there are a lot of people willing and able to do a job, that job generally doesn’t pay well. This is one of four meaningful factors that determine a wage. The others are the specialized skills a job requires, the unpleasantness of a job, and the demand for services that the job fulfills.
Economics is, at root, the study of incentives: how people get what they want, or need, especially when other people want or need the same thing. Economists love incentives. They love to dream them up and enact them, study them and tinker with them. The typical economist believes the world has not yet invented a problem that he cannot fix if given a free hand to design the proper incentive scheme. His solution may not always be pretty—it may involve coercion or exorbitant penalties or the violation of civil liberties—but the original problem, rest assured, will be fixed.
An incentive is simply a means of urging people to do more of a good thing and less of a bad thing.
Regression Analysis: Uses statistical techniques to identify otherwise elusive correlations.
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Crime
An average gang member in South Side Chicago has a 7% chance of being killed per year. A convicted murderer on death row has a 2% chance of dying per year. Penalties are no deterrent for crime.
If you both own a gun and a swimming pool in your backyard, the swimming pool is about 100 times more likely to kill a child than the gun is.
These two factors—childhood poverty and a single-parent household—are among the strongest predictors that a child will have a criminal future.
Guns alone are not the whole story. In Switzerland, every adult male is issued an assault rifle for militia duty and is allowed to keep the gun at home. On a per capita basis, Switzerland has more firearms than just about any other country, and yet it is one of the safest places in the world. In other words, guns do not cause crime
The evidence linking increased punishment with lower crime rates is very strong.
The Broken Window Theory: Minor nuisances, if left unchecked, turn into major nuisances: that is, if someone breaks a window and sees it isn’t fixed immediately, he gets the signal that it’s all right to break the rest of the windows and maybe set the building afire too.
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Racial
Is distinctive black culture the cause of economic disparity between whites and blacks or merely the reflection of it?
In examining the income gap between black and white adults—it is well established that blacks earn significantly less—scholars have found that the gap is virtually eradicated if the blacks’ lower eighth-grade test scores are taken into account. In other words, the black-white income gap is largely a product of a black-white education gap that could have been observed many years earlier. “Reducing the black-white test score gap,” wrote the authors of one study, “would do more to promote racial equality than any other strategy that commands broad political support.
The data reveal that black children who perform poorly in school do so not because they are black but because a black child is more likely to come from a low-income, low-education household. A typical black child and white child from the same socioeconomic background, however, have the same abilities in math and reading upon entering kindergarten.
Just how are the black schools bad? Not, interestingly, in the ways that schools are traditionally measured. In terms of class size, teachers’ education, and computer-to-student ratio, the schools attended by blacks and whites are similar. But the typical black student’s school has a far higher rate of troublesome indicators, such as gang problems, nonstudents loitering in front of the school, and lack of PTA funding.
Black students are hardly the only ones who suffer in bad schools. White children in these schools also perform poorly. In fact, there is essentially no black-white test score gap within a bad school in the early years once you control for students’ backgrounds. But all students in a bad school, black and white, do lose ground to students in good schools. Perhaps educators and researchers are wrong to be so hung up on the black-white test score gap; the bad-school/good-school gap may be the more salient issue. Consider this fact: the ECLS data reveal that black students in good schools don’t lose ground to their white counterparts, and black students in good schools outperform whites in poor schools.
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Drugs
Congress passed legislation requiring a five-year mandatory sentence for selling just five grams of crack; you would have to sell 500 grams of powder cocaine to get an equivalent sentence. This disparity has often been called racist, since it disproportionately imprisons blacks.
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Abortion
When a woman does not want to have a child, she usually has good reason. She may be unmarried or in a bad marriage. She may consider herself too poor to raise a child. She may think her life is too unstable or unhappy, or she may think that her drinking or drug use will damage the baby’s health. She may believe that she is too young or hasn’t yet received enough education. She may want a child badly but, in a few years, not now. For any of a hundred reasons, she may feel that she cannot provide a home environment that is conducive to raising a healthy and productive child.
One need not oppose abortion on moral or religious grounds to feel shaken by the notion of a private sadness being converted into a public good.
Perhaps the most dramatic effect of legalized abortion, however, and one that would take years to reveal itself, was its impact on crime. In the early 1990s, just as the first cohort of children born after Roe v. Wade was hitting its late teen years—the years during which young men enter their criminal prime—the rate of crime began to fall. What this cohort was missing, of course, were the children who stood the greatest chance of becoming criminals. And the crime rate continued to fall as an entire generation came of age minus the children whose mothers had not wanted to bring a child into the world. Legalized abortion led to less unwantedness; unwantedness leads to high crime; legalized abortion, therefore, led to less crime.
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Parenting
Harris argued, albeit gently, that parents are wrong to think they contribute so mightily to their child’s personality. This belief, she wrote, was a “cultural myth.” Harris argued that the top-down influence of parents is overwhelmed by the grassroots effect of peer pressure, the blunt force applied each day by friends and schoolmates.
For parents—and parenting experts—who are obsessed with child-rearing technique, this may be sobering news. The reality is that technique looks to be highly overrated. But this is not to say that parents don’t matter. Plainly they matter a great deal. Here is the conundrum: by the time most people pick up a parenting book, it is far too late. Most of the things that matter were decided long ago—who you are, whom you married, what kind of life you lead. If you are smart, hardworking, well educated, well paid, and married to someone equally fortunate, then your children are more likely to succeed. (Nor does it hurt, in all likelihood, to be honest, thoughtful, loving, and curious about the world).
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Expertise
Armed with information, experts can exert a gigantic, if unspoken, leverage: fear. Fear that your children will find you dead on the bathroom floor of a heart attack if you do not have angioplasty surgery. Fear that a cheap casket will expose your grandmother to a terrible underground fate. Fear that a $25,000 car will crumple like a toy in an accident, whereas a $50,000 car will wrap your loved ones in a cocoon of impregnable steel. The fear created by commercial experts may not quite rival the fear created by terrorists like the Ku Klux Klan, but the principle is the same.
An expert must be BOLD if he hopes to alchemize his homespun theory into conventional wisdom.
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Politics
And what about the other half of the election truism—that the amount of money spent on campaign finance is obscenely huge? In a typical election period that includes campaigns for the presidency, the Senate, and the House of Representatives, about $ 1 billion is spent per year—which sounds like a lot of money, unless you care to measure it against something seemingly less important than democratic elections. It is the same amount, for instance, that Americans spend every year on chewing gum.
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Real Estate
As incentives go, commissions are tricky. First of all, a 6% real-estate commission is typically split between the seller’s agent and the buyer’s. Each agent then kicks back roughly half of her take to the agency. Which means that only 1.5% of the purchase price goes directly into your agent’s pocket. So on the sale of your $300,000 house, her personal take of the $18,000 commission is $4,500. Still not bad, you say. But what if the house was actually worth more than $300,000? What if, with a little more effort and patience and a few more newspaper ads, she could have sold it for $310,000? After the commission, that puts an additional $9,400 in your pocket. But the agent’s additional share—her personal 1.5% of the extra $10,000—is a mere $150. If you earn $9,400 while she earns only $150, maybe your incentives aren’t aligned after all.
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Education
A child with a lot of books in his home tends to test higher than a child with no books.-ECLS Studies.
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Misc Quotes
Despite spending more time with themselves than with any other person, people often have surprisingly poor insight into their skills and abilities.
The dissemination of information diluted its power… “Sunlight is said to be the best of disinfectants.”-Supreme Court Justice Louis D. Brandeis
It is well and good to opine or theorize about a subject, as humankind is wont to do, but when moral posturing is replaced by an honest assessment of the data, the result is often a new, surprising insight.
Emotion is the enemy of rational argument.
It was John Kenneth Galbraith, the hyperliterate economic sage, who coined the phrase “conventional wisdom.” He did not consider it a compliment. “We associate truth with convenience,” he wrote, “with what most closely accords with self-interest and personal well-being or promises best to avoid awkward effort or unwelcome dislocation of life. We also find highly acceptable what contributes most to self-esteem.
For every clever person who goes to the trouble of creating an incentive scheme, there is an army of people, clever and otherwise, who will inevitably spend even more time trying to beat it. Cheating may or may not be human nature, but it is certainly a prominent feature in just about every human endeavor. Cheating is a primordial economic act: getting more for less.
How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it, except the pleasure of seeing it.-Adam Smith.
A correlation simply means that a relationship exists between two factors—let’s call them X and Y—but it tells you nothing about the direction of that relationship. It’s possible that X causes Y; it’s also possible that Y causes X; and it may be that X and Y are both being caused by some other factor, Z.
Social scientists sometimes talk about the concept of "identity". It is the idea that you have a particular vision of the kind of person you are, and you feel awful when you do things that are out of line with that vision.
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Chronology
15 Apr, 1987: 7M American children suddenly disappear when the IRS began requiring tax-filers to provide social security numbers for their dependents.-Freakonomics by Levitt.
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