Freakonomics - Part 1

FREAKONOMICS - Part 1

by Steven D. Levitt & Stephen J. Dubner

Starting from the general premise that there is often a hidden side to things, authors Steven D. Levitt and Stephen J. Dubner explore in their highly successful book Freakonomics 5 concepts:

          1. Incentives are the cornerstone of modern life.  

          2. Conventional wisdom is often wrong.

          3. Dramatic effects often have distant, subtle causes.

          4. Experts often use to their advantage the information only they have gathered and analyzed.

          5. The modern world becomes easier to understand when one knows what and how to measure 

              it. (12)

Chapter 1 of Freakonomics has an intriguing title - What Do Schoolteachers and Sumo Wrestlers Have in Common?  The answer to this question is, for the authors, evidence of Concepts 1 and 5. Analysis of data regarding teachers in the Chicago Public School system and professional sumo wrestlers reveals both the "power" (30) and the "dark side" (20) of incentives.

After the Chicago Public School system introduced high-stakes testing in 1996, teachers found themselves under enormous pressure to ensure that the vast majority of their students passed these tests.  While there were rewards such as praise, promotion, and job security for teachers whose classes performed well on the standardized tests, teachers whose classes did poorly could face the negative consequences of censure, being passed over for promotions, and even termination.  Hence, the incentives associated with teachers cheating when it came to high-stakes testing were tantalizing. On this point, the authors quote comedian W. C. Fields: "A thing worth having is a thing worth cheating for." (21)  The cheating by Chicago district teachers would likely have gone unnoticed if not for the sophisticated analysis of the multiple-choice test score data.  Identifaction of algorithms such as suspicious answer strings revealed that many teachers had either given correct answers to their students or simply changed their students answers themselves.  For instance, one teacher had 15 students in her/his class all give the same 6 consecutive correct answers.

According to the authors, examination of data also showed that many sumo wrestlers in Japan were cheating due to incentives - ironically though, not by winning matches but by deliberately losing them!  The data analysis was extensive.  From examining the results of 32,000 tournament matches between 1989 and 2000, suspicious patterns emerged.  Most notably was that close to 80% of matches between sumo wrestlers with 7 and 7 win-loss records and 8 and 6 win-loss records resulted in the generally lower-favoured 7-7 wrestler somehow winning the match.  The incentives for winning a majority of tournament matches are enormous, icluding a huge increase in both income and prestige.  Thus, the authors speculate that big bribes were offered by wrestlers with 7 and 7 records to those with 8 and 6 records to throw matches.  Wrestlers with 8 wins and 6 losses had nothing to lose by throwing such matches since they were already guaranteed a majority of wins and the incentives associated with that feat.  

Teachers and sumo wrestlers - Strange bedfellows!

In Chapter 2, Levitt and Dubner again show how a similarity between two very different groups provides evidence for their concepts. In this instance, it's that both the infamous Klu Klux Klan and real-estate agents are motivated by incentives (Concept 1) and have gained advantage from information hording. (Concept 4)

As a secret society, the Klan struck fear in the hearts of its opponents and enemies through its violent, scourge of God image while also appealing to uneducated whites by claiming to be a righteous, not-for-profit association.  However, after a journalist named Stetson Kennedy fed information he obtained from inside sources in the Klan to radio personality Drew Pearson, the Klan was revealed to the American radio audience to be a far less powerful group and its so-called righteous leaders little more than racist profiteers.  The authors conclude,  "[Pearson] turned the Klan's secrecy against itself by making its private information public; he converted heretofore precious knowledge into ammunition for mockery." (61)

With respect to real-estate agents, Levitt and Dubner explain that, like most people, they are motivated by incentives.  The realtor's incentive is the quick and tidy commission he/she can earn by persuading "...the homeowner to sell for less than he would like while at the same time letting potential buyers know that a house can be bought for less than its listing price." (70)  This sleight of hand is accomplished by the realtor's withholding from the homeowner expert information on the housing market, such as recent sales trends and inventories of similar houses.  The real-estate agent uses his/her "informational advantage" (what economists call imformation asymmetry) to befuddle the homeowner and "...make [him/her] feel stupid or rushed or cheap or ignoble." (65)

Concept 2, Conventional wisdom is often wrong, is the theme of Chapter 3 "Why Do Drug Dealers Still Live With Their Moms?"   During the 1990s, the illegal crack cocaine industry exploded in America.  The image portrayed by the media was of millionaire crack dealers engaging in "one of the most profitable jobs in America." (89)  This image, however, couldn't have been farther from the truth.  The reality was that the vast majority of crack dealers operated in impoverished urban neighbours and were, indeed, earning so little they could only afford to live at home.  Sudhir Venkatesh's analysis of a Chicago gang which controlled the crack cocaine market around a housing project on the south shore of Lake Michigan revealed that gangs operated like American corporations: Gangs were hierarchical with a small group of central leaders at the top of the pyramid, followed by local leaders then a small group of officers who reported to the leaders.  Towards the bottom were many foot soldiers who actually sold crack in the steets, and underneath them were scads of rank and file members.  While the leaders enjoyed large profits, foot soldiers in the gang Venkatesh investigated earned less than minimum wage!   So then one might ask, why would foot soldiers peddle crack cocaine?    

            Well, for the same reason that a pretty Wisconsin farm girl moves to Hollywood.
            For the same reason that a high-school quarterback wakes up at 5 a.m. to lift
            weights.  They all want to succeed in an extremely competitive field in which, if
            you reach the top, you are paid a fortune (to say nothing of the attendant glory
            and power. (102)

The answer is, simply put, that "...criminals, like everyone else, respond to incentives." (103)