Freakonomics by Steven Levitt is a of curiosities, myth-busting and intriguing facts. If you are not already well read in that area, it can also add to your psychological knowledge.
- Bullet Summary
- Full Summary
- Real Life Applications
- Crime rates dropped because of abortion law
- Economic incentives can crowd out moral or social incentives
- We all tend jump to explaining event through apparent causation, but that can be spectularly wrong
Freakonomics starts by taking aim at a pillar of old economic theory: the one on economical incentives.
Economical Incentives Are Just One of Many
For decades eonomists love the idea of the economically rational incentives. We are all rational, postulated the now almost dead Homo Economicus framework.
And Freakonomics does not deny that incentives play a huge role. Especially because Freakonomics includes among the word “incentives” not just the economic incentives, but also the social ones (not wanting to look bad) and the moral ones (not wanting to do something that feels wrong).
Economical Incentives Can Backfire
Focusing only on one side of the incentive equation, such as the economical ones, can indeed often backfire. The author uses the example of a the now famous daycare center in Hafa.
To reduce the amount of late pick-ups by the parents the school started charging a $3 dollars fine for every time a parent would show up late.
Did that decrease the incidence of late pick-ups? No, it doubled it.
Why? Because the financial fine replace the moral obligation. Now the parents felt that, by paying the fine, it would be OK for them to show up late.
Sort of a “pay per time”.
When you are thinking about introducing incentives, think instead if you there are already other incentives which you could strengthen instead.
If you are interested on the topic I can highly recommend you read Drive by Daniel Pink.
Incentives Depend on Context
Imagine a contribution box where people can chip in money in exchange for bagels. It mostly relies on the incentives of wanting to be honest and wanting to look honest by the people who happen to be around.
What can it teach us about contextual incentives?
Donations were higher when:
- It was a sunny day
- The overall office mood was higher
- During non-stressful holidays were (Christmas and Tanksgiving are labeled as stressful)
- After 9-11 happened, which is probably because of a general surge in empathy
Incentives Are Not Always as Aligned as They Seem
Imagine you want to sell a house. Theoretically the interest of a real estate agent is the same as yours: selling it at the highest possible price.
However the amount of commission the agent would earn for selling your house at a 10% higher price is not much as compared to how much time they can save by closing the deal quickly and moving on to the next house.
Indeed data shows that when real estate agents sell their own houses, they keep it on the market longer to wait for a good offer.
“Experts” and Exploitation
Freakonomics explain how people in possession of specific knowledge that we need can use our ignorance to trick us or overcharge us.
Lawyer and accountants are examples of experts. But also a car salesman can take the role of an expert when for example he leverages our fear saying that a cheaper model is “not so safe”.
When you feel someone is trying to play on your fears always delay decisions.
And then ask a second opinion or research. The Internet is a God-send gift here in helping reduce the information disparity.
The Internet Power House
In the nineties the prices for life insurance policies fell dramatically. Why was that? The author says it’s because people were suddenly able to quickly compare prices.
Similarly if you need to sell a house these days you can easily go online and look at the prices and you don’t need to trust the real estate agent.
Give Info: When You Don’t, People Expect The Worst
Why do cars lose as much as a quarter of their value the day after they have been bought?
The author says it’s because of asymmetry of information.
Since the buyers cannot know what happened to the car and why you’re really selling, they fear the worst.
Similarly the very worst thing you can do on an online dating profile is to omit your picture. People will naturally think the worst.
Correlation is Not Causality
This is a mistake tat we all often do.
That is to see two variables move together and to assume that one is causing the other. There might indeed be a correlation between the two variables, but correlation is not causality.
Also read: Fooled by Randonmenss.
More Money Doesn’t Win Election
A great example is that of money and politics. Usually the candidate with the most expensive campaigns wins. So people tend to think that money wins election.
But the winner has more money only because people tend to back the favorite candidate at a higher clip. The author says that the winning candidate could cut its campaign spending by half and only lose 1% of the vote.
What’s Near is Causal
When looking to what caused something, we also tend to give a disproportionate amount of attention to whatever is close and easier to be noticed.
For example when the crime rate dropped precipitously in the early 1990s in the US most commentators said it was because of improving economy, more police, gun control and similar.
In reality it was because of the abortion law. The most likely convict born in poverty in single parent households. With abortion fewer likely criminals were coming of age in 1989.
As Cialdini says “what’s focal is causal”.
Real Life Applications
Don’t Jump to Causal Conclusions!
It’s tempting to see an event, look for a possible cause and automatically explain the event with the first cause we can find.
Especially so if there is an apparent link between the even and the “cause” we found.
But correlation is not causation.
P.S.: as a kid it annoyed me to no ed seeing my parents always jumping to causal conclusions.
The second part of the book loses a bit of the edge
Pushes Us to Ask Deeper Questions
One thing Freakonomics does great and which I really appreciate it for, is to urge people not to stop at the first layer of analysis.
To get to the truth, we often have to first overcome our own biases.
Freakonomics is a book that purports to leverage an economics background to ask tough questions and answering with data .
In reality, it’s a book of intriguing facts, data curiosities and psychology biases.
Since most facts are indeed intriguing, the book has become a big success and a brand in itself.
There is some interesting stuff and it’s a good book, but it’s not enough to make it to the very top of the best books you must read.
However, what Freakonomics does great is to marry information with entertainment factor. So if you are looking for a book to entertain you AND to teach you something, I highly recommend it.