Freakonomics

Freakonomics
By Steven D. Levitt and Stephen J. Dubner
Reviewed by Daniel Hindes

This is first and foremost and interesting book. The premise is to take the tools of economics – rigorous statistical analysis of voluminous data – and apply it to topics beyond the range normally addressed by economists. The result are, of course, interesting. Interesting enough to put the book and to the best-seller list and make it a topic of many discussions. I, too, was pulled in, and found myself reading quotes from it to friends and family. In short, it’s worth the read.

The book has two authors, one a journalist, the other an economist. Steven Levitt is the economist, was ideas form the bulk of the book, while Stephen Dubner, the journalist, puts them into engaging prose. One way of doing this is front-loading the book, placing half interesting discoveries in the introduction. And so the introduction starts off with the most controversial idea, namely that the introduction of legalized abortion in 1973 is the cause most responsible for the dramatic drop in crime in US in the late 1990s. It’s the type of cause and effect thinking that most people would probably not come to on their own. And although the idea makes sense, it is not on its inherent logic that the proof rests. Rather, in a later chapter, Steven and Stephen explore statistically all the factors that are related to crime, as well as those factors thought to be related to crime, in order to see what degree of influence each might have. And in the end no other explanation accounts for the dramatic shift in the crime rate. And so the fact stands, as morally difficult as it may be.

The introduction wanders through a couple of other points, such as why real estate agents tend to under price houses by 3 to 5% (they sell faster and easier that way, while the extra effort required to get the last $10,000 or $20,000 for the house are not worth the additional $150 that the realtor would earn in increased commission). This point is easily proven using mathematics and enough processing power by comparing homes the realtors sell for clients (in this case in the city of Chicago) to those houses realtors sell on their own behalf. Sure enough, realtors hold out for a higher price when it’s their own money.

The next highly interesting point: statistically, money doesn’t buy elections. That seems counterintuitive, but it is statistically established. Money flows to candidates that are in the lead, and they certainly spend it, but no amount of money will elect an unviable candidate. If voters do not like the candidate to begin with, that candidate can spend any amount of their own personal fortune, but that won’t change the outcome. Mining the data and controlling for certain variables, it has been established that money can shift about one percentage point for or against a candidate. (These results are only true in our two-party system, and say nothing about influence buying after the election in the form of lobbying.) The other eye-opening fact: the total amount of money spent during a presidential election year on all political offices combined is about $1 billion, which sounds like a lot until you compare it to other industries. It turns out this is the same amount Americans spend every year on chewing gum.

Having dished up some goods in the introduction, the first chapter asks “What Do Schoolteachers and Sumo Wrestlers Have In Common?” This chapter tells the story of two economics papers, one that analyzes Chicago public school test data for evidence of teachers cheathing on student standardized tests, the other one looking at sumo wrestlers in certain close matches where a win is far more important to one than the other. In both cases logic and a lot of computer processing power were able to find patterns that raise suspicion. Along the way the text is sprinkled with interesting bits of history, and slips in an introduction to basic economic theory. The answer to the question in the chapter title: they both cheat on occasion in ways that can be demonstrated with data analysis.

Chapter Two considers “How Is the Ku Klux Klan like a Group of Real Estate Agents?” The brief history of the clan that is given in the first three pages of the chapter is itself highly interesting. Then the history of Stetson Kennedy and his efforts to break up the clan are detailed. The point of the piece is that the Klan operated on the basis of secret information, and once the secret got out the Klan ceased to be interesting and attract new members. And that’s the point of this chapter, that some people have more information than others, and they use their secret information for their own benefit against those who do not know the secrets. This is the case with the realtors, insurance salesman, investment bankers, energy traders, and many other industries. And the main point looking forward is that the Internet, with its ability to easily disseminate massive amounts of information in an easily searchable and low-cost manner, is gradually eliminating the advantages that information experts have.

The main tool used by those who have the upper hand in a situation of information asymmetry is fear. That is, those who know use your fear of that which you don’t know in order to take advantage of you. And so the book returns to real estate agents and the tactics they use to help you price your home lower than you could, buy more rapidly than you should, and sell for less than you might. They do this because the incentives for the realtor are aligned towards closing deals quickly. This is followed by a fascinating analysis of how realtors speak in code through for-sale listings. Basically, words that describe the actual house tend to show up in ads for houses the desirable, while words to describe impressions of the house (such as “charming” or “spacious”) indicate the house has not much else to recommend it.

The next chapter, “Why Do Drug Dealers Still Live with Their Moms?” discusses the results of yet another fascinating paper. In this instance a sociologist examining the life of a crack dealing gang got access to their accounting records. These were shared with an economist, and the economic basis of crack-dealing gang enterprise was examined. It turns out the crack gang is a lot like professional sports. Many try, but few succeed. A dozen or so individuals at the top of multiple gangs can make as much as a half-million dollars a year. The leader of a gang may make $100,000 a year. But your average drug dealer out on the street corner makes closer to three dollars an hour – below minimum wage. They are all trying to work their way up the ladder, hoping for a chance the big time. But most won’t make it.

“Where Have All the Criminals Gone” examines the relationship of abortion to reduce crime as mentioned in the introduction, but in greater detail. The paper was published several years ago, and has received much criticism. This criticism is in turn addressed in this chapter. Other factors are dealt with in the authors feel the point still stands.

Chapter 5, “What Makes a Perfect Parent?” was quite interesting to me, being a parent myself. The first point the authors make is that parenting experts, while always certain, certainly contradict each other continuously. And once again the basic emotion – fear – is something the experts hold over parents. So what can economics say about parenting? (Well not so much economics, but rather the tools economics – statistical analysis.) In the end, statistical analysis can only narrowly address the question. The data used for the analysis is school test scores. These are compared with socioeconomic data and other factors which are then controlled. The perhaps startling result of this analysis is that who the parents are matters of great deal, but what they do as parents (parenting style) matters almost nothing in determining how children score on standardized tests. Certain things matter a lot, such as the parent’s socioeconomic status. But the type of parenting doesn’t change much of anything. Two related and interesting facts. After controlling for socioeconomic status, black and white children enter first grade at roughly equal levels of ability (that’s after controlling for socioeconomic status; in absolute terms blacks are still far behind whites on average). The interesting point is that by second grade blacks have statistically fallen behind even after controlling for socioeconomic status. This appears to be the result of poor schools. But it does offer some hope, because it indicates that if the schools could be fixed, the children would be better educated. Another interesting fact from this chapter: statistically, children are 100 times more likely to die in a swimming pool than from playing with a gun. The implication for parents: fear pools, not handguns.

The final chapter examines the influence of names on life outcomes. The question in particular is, does having an obviously black name impair life opportunities? The first thought would be, “Well, if it causes a person to be discriminated against, then it must be harmful.” And that appears logical. But if you dig deeper, it’s also possible to turn all the way around. Names appear to correlate to socioeconomic status. The basic pattern is, a certain name becomes popular among the wealthy, and then in the course of a decade becomes more common among the middle class. Eventually the wealthy move along to new names, and middle class names move down to become lower class names. (The book contains plenty of examples and statistics to prove the point.) And then there are those names that were never popular among the wealthy: the black pride names. The statistics seem to indicate that those born to parents who give them such a name are for many reasons unlikely to interact very much with those who would discriminate against such names. And so it appears that in the end a name does not actually matter that much.

And so the book ends, all too soon. It’s is a fascinating and quite compelling read, and I would have gladly read more were it three times the length. Mixed between the economic theory and lots of interesting examples is a little bit as history, telling you things you don’t know that give you a broader perspective on the world in which we live. I can only recommend the book. It certainly deserves its bestseller status.