Economics is fundamentally about understanding how people respond to incentives to get what they want and need. This book, Freakonomics by Steven D. Levitt and Stephen J. Dubner, explores a range of topics from crime to parenting to show that that things are often not what they seem. We tend to see things through our morals and ideals, when everything actually operates based on economic incentives and disincentives. In this Freakonomics summary, we’ll briefly outline the key ideas presented in the book. To read the various real-life examples and analyses by the authors in detail, do get a copy of the book, or get a detailed overview with our complete book summary bundle.
The book is presented in 6 key chapters with no unifying theme. In each chapter, the authors ask a seemingly-strange question, then use detailed stories and data to uncover the unexpected and often-uncomfortable truths. Here’s an overview of the 6 main Freakonomics chapters and the key message behind each one:
|What do schoolteachers and sumo wrestlers have in common?||They respond to incentives, and will cheat if the incentives are “right”.|
|How is the Ku Klux Klan like a group of real estate agents?||They both use/manipulate information for their own gains. Information is power.|
|Why do drug dealers still live with their moms?||Most drug dealers make much less money than we think. Conventional wisdom is often wrong.|
|Where have all the criminals gone?||The fall in crime rates in the U.S. in the 1990s is not due to most of the factors we read about in the newspapers.|
|What makes a perfect parent?||Parenting strategies and techniques matter much less than you think.|
|Would a Roshanda by any other name smell as sweet?||Names are correlated with your life outcomes, but they’re a only a reflection (not a cause) of your circumstances.|
We’ll now zoom into details of the first section on incentives and cheating. Do get a copy of our full Freakonomics summary (click here for full 14-page summary) for more details on all the chapters outlined above.
Freakonomics: Uncovering the Hidden Side Of Things
Incentives and Cheating
Our world revolves around incentives. To understand and solve problems, we must figure out how incentives really work.
An incentive is basically a way of encouraging people to do more (or less) of something, e.g. rewards for getting good grades vs punishments for bad behavior. Incentives are the building blocks of economics: almost every decision can be explained through incentives. To be effective, they must relate to things that people want or need.
There are 3 types of incentives—economic, social, and moral—and most incentive schemes include all 3 elements. For example, people may avoid crime due to a mix of economic incentives (to avoid being fined or jailed), moral incentives (to do what’s “right”) and social incentives (to be seen in a good light).
A day-care center wanted parents to pick up their kids on time, so they levied a $3 fine for parents who were late. However, the number of late pickups actually doubled.. That’s because the fine was too affordable, sent the wrong signal that being late wasn’t a big deal and removed the parents’ guilt of being late. Without a moral incentive, parents continued to be late even when the $3 penalty was removed.
People cheat in order to get more for less. When the stakes are high enough, anyone may cheat. To prevent cheating, you must understand what people want, how they think and how they’d respond to specific incentives or disincentives. In our complete summary, we’ll dive into examples of how school teachers, elite sumo wrestlers and blood donors alike all cheat when the incentives are big enough, and what we can learn about honesty from a bagel business.
The Power of Information
Information (or the lack of it) can strongly influence behaviors and decisions. Its impact depends on who possesses it and how it’s used. Information asymmetry occurs when one party in a transaction has better information than the other party. In this chapter, the authors show the power of information–how it brought down a secret society (Ku Klux Klan), how even assumed information shapes human behavior, and how experts (e.g. doctors, lawyers, real-estate agents) exploit informational advantage for their benefit (not yours). In fact, everyone abuses information, including you. Find out why/how in our complete Freakonomics summary :)
The Fallacy of Conventional Wisdom
“Conventional wisdoms” are notions that reinforce people’s self-interests, self-esteem and well-being. So unfortunately, most conventional wisdoms are convenient and comforting, but wrong. Check out our full Freakonomics summary bundle for (i) examples of how the news media (including experts and advertising) contribute to wrong “facts”, and (ii) why many crack dealers still live with their mums (hint: drug dealers earn much less than what we’ve been led to believe), and (iii) what crack cocaine has in common with nylon stockings.
Uncovering Distant, Unexpected Causes
Small, indirect and remote causes can trigger huge, unexpected outcomes. To understand and simplify our complex world, you must know what to measure and how to do it. The authors explain how they used data to filter out the facts vs myths of crime. Do get more details from our full 14- page summary.
Being the Perfect Parent
Many parents are obsessed about doing the right things to ensure their children’s success. However, data suggests that the things parents do matter less than who/what they are. In our Freakonomics summary bundle, we explain why parents tend to focus on the wrong things, what are the parenting factors that’ve been found to affect children’s academic performance (vs those that don’t), and what we can learn from those data.
Names and Life Outcomes
Does the name given to a child affect his success or failure in life? Well, data shows that names are correlated with (but do not determine) people’s life outcomes. The authors explain how this conclusion was derived using data, why someone with a distinctively “black name” will do worse in life than someone with a distinctively “white name”, and why it’s possible to predict the most common baby names in 20 years by studying the baby names that’re currently the most popular among the upper-class.
Conclusion and Other Details in Freakonomics
The main message of this book is to look beyond conventional wisdom and rose-tinted lenses of what we wish or imagine the world to be. By asking lots of questions and analyzing facts/data in detail, you can start to figure out what’s truly going on. Bear in mind that in most cases, even with regression analysis, you can only prove strong statistical correlation but not causality.
In the book, the authors provide much more details of the various examples and ideas outlined in our summary. The 2006 revised and expanded version of this book also includes additional articles and blog entries. Do get a copy of the book for the full details, get our Freakonomics book summary bundle for an overview of the various ideas and examples, or check out more detail/resources at freakonomics.com.
Learn how you can use facts and data to uncover the hidden truths!