Freakonomics
Key Terms
:
Conventional Wisdom
: Explanations generally accepted as true.
Correlation
: Relationship between two or more things which change (variables) and can be described mathematically; Refers to how closely sets of information or data are related. For example: Smoking has a high correlation with lung cancer. Freakonomics
: Study of economics based on the principle of incentives.
Incentives means of urging to do more of a good thing or less of a bad thing.
:A
The Authors identify three kinds:
1.
Economic Incentives person responds in the marketplace
–
2.
Social Incentives motivate people to respond in a certain way
–
because they care (or are worried) about how they’ll be viewed by others
3.
Moral Incentives appeal to a person’s sense of right versus wrong
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Informational Asymmetry
: Situation in which one party has more information than the other party.
Snob Effect
: The desired to own exclusive or unique goods. The demand increases as the price increases.
Freakonomics
provided me with concrete illustrations of how unconventional methods of data collection and analysis are often necessary to make sense of the world. Knowing what to measure (and how to measure) data makes a complicated world ... somewhere less complicated. As I read the dumbstrucking
Freakonomics,
I found this quote, “If you learn how to look at data in the right way, you can explain riddles that otherwise might have seemed impossible. Because there is nothing like the sheer power of numbers to scrub away layers of confusion and contradiction." Introduction, pg. 13. This quote follows exactly what I said previously perfectly.

Chapter 1: HAT DO ALL SCHOOLTEACHERS AND SUMO
W
WRESTLERS HAVE IN COMMON?
The authors begin by defining economics as nothing more than the study of incentives and how they are pursued. They explore several systems and their incentive structures, then cover the behaviors that perverse incentives can lead to. Here are three systems they covered:
The first case considers a group of ordinary people, school teachers, performing an ordinary task, testing their students. Recently, standardized testing has become mandatory in public schools. The No Child Left Behind law awards schools that make progress on these standardized tests and punishes schools that chronically lag behind. Levitt and a coauthor developed a computer algorithm to look for strings of suspicious answers on standardized tests. An analysis of data on the test scores of children in public schools in the
Chicago Public School system reveals evidence that teachers cheat by substituting the right answers on students tests in about five percent of classes taught. Second case, Sumo wrestling in Japan, which is synonymous with
Japanese national pride, is practiced by only the most honorable of men. Yet the analysis described in this chapter provides evidence that a significant number of sumo wrestling bouts are actually “rigged” when it really counts.
Finally, data collected by Paul Feldman, an entrepreneur who decided to start a bagel business in the Washington, D.C. area shows that people are not above cheating, even when the gain is very low (95 cents for a bagel). Even more interesting is the observation that cheating appears to be more likely as the income level of customers increases.
In this chapter, we learn that incentives apply in unexpected ways to stalwart members of the community. Some teachers face possible sanctions if their students don’t perform well on standardized tests. They may see cuts in

funding for the school, or worse yet, they could lose their job. So teachers react in a way one would never think a teacher would – they cheat. There is compelling evidence that sumo wrestlers, whose craft is associated directly with honor in Japanese culture, appear to cheat as well. The Freakonomics data in this chapter suggest that a wrestler might throw a match to help his opponent maintain his current ranking. It’s all over a social construct, to make themselves look good. Who knew that schoolteachers and sumo wrestlers have something in common?

Chapter 2:
HOW IS THE KLU KLUX KLAN LIKE A GROUP OF
REAL‐ESTATE AGENTS?
In this chapter, the authors show how the lack of information among communities allowed the KKK to exert considerable influence over the lives of those it considered the “enemy” (blacks, Jews, Catholics, etc). The remainder of the chapter explores how individuals capitalize on an informational advantage by exploiting informational asymmetries and human emotions – such as fear and sorrow. For example, real estate agents have a better sense of housing market conditions than do buyers and sellers. They can combine this superior knowledge with the buyer’s (seller’s) fear that he/she won’t be able to find a house (sell his/her house) to achieve a deal which is in the agent’s best interest but not necessarily the best interests of the buyer or seller.

Chapter 3:
WHY DO DRUG DEALERS STILL LIVE WITH THEIR MOMS?
In this chapter, Levitt provides an in‐depth discussion that shatters the conventional wisdom that most drug dealers are wealthy. His analysis of the financial records of a the Black Disciples, a Chicago gang, proved that most street‐level dealers earned far less than minimum wage. In fact, they earned an average of three dollars an hour. With this story, the authors introduce the concept of a ‘winner takes all’ labor market.
1. Winner Takes All Labor Market
This describes a situation in which many laborers compete for a position in the market, but few actually succeed in finding employment. Those few who do are paid extraordinarily large salaries. In the example of the Chicago drug gang, 2.2% of the members earned more than half the profits. Levitt and

Dubner refer to this labor market as a “tournament.” A tournament, of course, refers to a situation in which many players compete against each other and, one by one, are eliminated. Similar dynamics exist in music, sports and entertainment. Chapter 4:
WHERE HAVE ALL CRIMINALS GONE?
This chapter considers a variety of possible explanations for the significant drop in crime and crime rates that occurred in the 1990s. Based on articles that appeared in the country’s largest newspapers, the authors compile a list of the leading, commonly offered explanations. The next step is to systematically examine each explanation and consider whether available data supports the explanation. What the authors demonstrate is that in all but three cases – increased reliance on prisons, increased number of police, and changes in illegal drug markets – correlation was erroneously interpreted as causation
(and in some cases, the correlation wasn’t even that strong). This leads us to what is arguably Levitt’s most controversial finding: His research revealed a strong link between the legalization of abortion in the United States in 1973 and the sharp decline in violent crime that the nation experienced in the mid‐1990s. This conclusion is based on statistical and econometric analysis that focuses on, among other things, the characteristics of criminals, the increase in the number of abortions following its legalization and the characteristics of those women most likely to get an abortion.

Chapter 5:
WHAT MAKES A PERFECT PARENT?
This chapter summarizes the results of studies by Levitt and his coauthors, as well as other studies, that examine the influence demographic, cultural and other variables have on the performance of school‐age children on standardized tests. The chapter begins by reviewing how many parents get educated on raising their children and how parenting experts swing from one extreme position to another in an attempt to get the attention of risk‐adverse parents.The authors then consider what motivates parents and others to worry more abou t certain risks than others, focusing on the effects of fear and a misinterpretation of available data.

Chapter 6:
Perfect Parenting, Part II; or: Would a Roshanda by Any
Other Name Smell as Sweet?
This chapter continues to explore the question of what impacts parents have on their child’s success by focusing on the effects, if any, of the child’s name. Considering that baby naming has become big business the question becomes, Does the child’s name matter when it comes to the child’s potential for economic success? The short answer is no. The authors focus primarily on the very different names black and white parents choose for their children and explore whether those differences are a cause of the economic disparity between the two groups or a symptom (building on the work of Professor
Roland Fryer Jr.) Citing a considerable amount of analysis of data on names from California, we learn at least three things: (1) the names chosen by black and white parents are extremely dissimilar, (2) a child’s name is not a determinant of success but rather a predictor because of what it conveys about the child’s parents (and what that means for the child’s likely economic success), and (3) names tend to cycle through socio‐economic strata over time, moving from higher to lower strata and eventually out of favor with most parents. As the chapter title suggests, when we consider the names parents give their children, an important question arises; does a child’s name has any effect on his/her prospects for success? Indeed, a casual examination of the relationship between names and the economic success of the people bearing those names would seem to suggest that in many cases a person’s name really does matter. However, what we’re really seeing is the relationship between the child’s prospects for success and the parent’s socio‐economic characteristics. Once again, we have to be careful to avoid confusing correlation with causation (recall the example of ice cream sales and drownings we discussed in Chapter 4). Regarding a child’s name, what the evidence tells us is that it is not the name that matters. Instead, what matters are the characteristics of the parent who gave the child his/her name. On a related note, it is worth considering whether a person’s name could contribute to discrimination against that person. Once again, the data fail to support such a connection.