Freakonomics: A Rogue Economist Explores the Hidden Side of Everything

The Introduction surveys the ideas explored throughout the book, beginning with crime in the 1990s. During the early 1990s, increasing crime rates brought anxiety to Americans, who feared a “superpredator” criminal type, “a scrawny, big-city teenager with a cheap gun in his hand and nothing in his heart but ruthlessness” (1-2). Experts predicted a new crime wave. Instead, by 2000, all types of crime had dropped to rates not seen since 1965.

The drop, said experts, was due to an expanding economy, or tougher gun laws, or improved policing. Instead, a major cause was the Supreme Court ruling in Roe v. Wade that legalized abortion. Studies showed that “a child born into an adverse family environment is far more likely than other children to become a criminal” (4). Impoverished mothers who shied away from the costs and risks of illegal abortions could now have the procedure performed legally and at low cost. The population of at-risk children dropped and, years later, so did the crime rate. Experts ignored this.

Real estate agents ought to want the best price for their clients’ home sales because they get a percentage of the price. A study of Chicago home sales, however, shows that agents keep their own homes on the market 10 days longer than they do the homes of their clients. An extra $10,000 in the sale price of their home goes directly into their pockets, while the same increase in the sale price of a customer’s home nets them merely an extra $150 in commissions. Agents make more money by getting a quick sale for the client and moving on to the next sale.

Political candidates who spend more on campaigns tend to win more often. Candidates who already are ahead in the polls, however, tend to get more campaign contributions because contributors expect favorable treatment and won’t get it from a clear loser. Many candidates often run against the same opponent multiple times; in those cases, doubling the spending improves their chances only about 1%. Money is important, but rarely does it make the difference.

Freakonomics takes the view that incentives explain human behavior; that “conventional wisdom is often wrong” (12); that big effects sometimes have small causes; that experts often use inside knowledge for their own benefit; and that careful measurement makes complex issues simpler. This book uses the power of economic thinking to explore “freakish curiosities” and provide surprising insights into how people make decisions.

Adam Smith, founder of the science of economics, saw that the modern world was changing the rules of human behavior. He believed that the best way to understand these changes was to step outside them as an “impartial observer” and see what’s really going on.

At a typical Israeli daycare center, an average of eight parents per week were late picking up their children, which added to the centers’ costs. Researchers imposed a $3 penalty hoping to reduce the tardiness; instead, the average number of late parents increased to 20 per week.

The authors write, “An incentive is simply a means of urging people to do more of a good thing and less of a bad thing” (17). Incentives can be rewards, such as bonuses for good work, or penalties, like a fine for driving too fast. Not all incentives work as intended. The Israeli fine for tardy parents was too small, and it transformed their feelings of guilt in to a simple economic calculation: For an extra $60 a month, they could be late every day.

There are three types of incentive: economic, social, and moral. For example, cigarette smokers pay a “sin tax” per pack (economic); they’re banned from smoking in restaurants (social); and they’re warned about buying cigarettes on the black market, where terrorists often raise money (moral). Likewise, crimes are discouraged with fines and imprisonment, social shaming, and moral arguments against harming fellow citizens.

Incentives can be tricky. Because of a “constantly readjusted web of economic, social, and moral incentives,” murders in Europe fell from dozens per 100,000 people in the 1300s to about one per 100,000 in the 1990s (18-19). Yet when blood donors receive a small payment, donations drop—the act no longer seems virtuous but becomes merely a low-paying job—and if the stipend goes way up, people cheat with fake or stolen blood, false IDs, and so on.

People cheat all the time. In 1987 a new US tax rule required parents to report the Social Security number of any child they entered as a deduction. Seven million children suddenly disappeared from the tax rolls. Also in the US, more stringent testing of students, with rewards and penalties for good and bad teachers and schools, incentivized cheating—specifically, when teachers correct students’ test answers.

For example, when Chicago academic testing became more rigorous during the 1990s, cheating spiked, especially in poorly performing classrooms. Those students might improve greatly only to regress the next year; unpromising pupils all would have the same correct answers in one test section but not others. These are signs of cheating—not by students but by their teachers, who altered the answer sheets, especially on the tougher questions. The study detected obvious cheating in 5% of classrooms; more subtle forms of deception, like giving extra time or coaching, weren’t investigated. In North Carolina, though, 35% of teachers reported seeing colleagues cheat on state exams.

The Chicago study also detected good teachers whose students showed steady improvement year over year. A selection of 120 classrooms, some suspected of cheating and others used as controls, were retested by the school board. Test officials, not teachers, collected the answer sheets. Control classrooms returned roughly the same results as before, while suspicious rooms produced scores that plummeted an entire grade. A dozen teachers were fired; subsequent cheating fell by 30%.

Cheating is also widespread in sports. Athletes and coaches understandably cheat to win; “[a]n athlete who cheats to lose, meanwhile, is consigned to a deep circle of sporting hell” (37). Yet even in as honored a sport as Sumo wrestling, statistics suggest some wrestlers take falls.

Each two-week elite Sumo tournament includes 15 bouts per contestant; those who win eight or more bouts rise in the ranks; those scoring seven or fewer drop down. On the last day, an 8-6 wrestler already has won promotion but won’t compete for the top money prizes; he has little to lose if he does a favor for a 7-7 opponent by taking a fall. Statistics predict that a 7-7 player will win 48.7% of the time against an 8-6 opponent, but in fact 7-7 players win nearly 80% of such bouts. They also win 73.4% of their final contests against 9-6 opponents. Either they’re trying supremely hard to avoid a drop in rank or the fix is in.

It turns out that such 7-7 wrestlers typically lose 60% of the time to the same opponent the next time they meet; thereafter, their results run about 50-50. This strongly suggests that they traded wins deliberately. Now and then, the Japanese press alleges match rigging; at the next tournament, 7-7 wrestlers win only about half their final matches. Two former wrestlers announced they would come forward with evidence of match rigging; instead, both died “hours apart, in the same hospital, of a similar respiratory ailment” (43). No investigation was conducted, but police announced that their deaths were a coincidence.

From 1962 to the early 1980s, Paul Feldman worked as a weapons analyst for the US Navy. He got into the habit of bringing bagels to his office every Friday, eventually providing 15 dozen to his cohorts and nearby departments. To defray the cost, Feldman set out a basket for donations with a suggested-price sign; staffers honored it at a 95% rate. Eventually, he retired from research and sold bagels in the mornings to the staffs of nearby office buildings, using a similar honor system of payment. Feldman made as much money from this as he had from his previous job.

He kept meticulous records that shine a light on white-collar crime, which is otherwise hard to detect; no one is physically injured or assaulted if someone “borrows” some pens, so no crime report is filled out. Feldman’s honor-code system at first returned more than 90% on average, but by 2001, it had dropped to 87%. After the 9/11 terrorist attacks, contributions climbed 2% and stayed at that level. Smaller offices out-payed larger ones by 3 to 5%; perhaps the small-town atmosphere within a small business assures greater honesty. Bad weather and money-spending holidays like Christmas and Valentine’s Day caused more cheating. High-ranking company officers cheated more.

Glaucon, a pupil of Socrates, told the story of the Ring of Gyges about a man who discovers a ring that makes him invisible and uses it to seduce the queen and kill the king. Glaucon argued that people are essentially selfish and would hurt others if they could get away with it. Feldman’s bagel business shows that, at least 87% of the time, people who might get away with theft are honest after all.

During the decade after the US Civil War, a renegade organization, the Ku Klux Klan, rode roughshod through the South, threatening Black Americans who tried to exercise their newfound freedoms. The KKK died away but revived in 1915, when the film The Birth of a Nation popularized the group’s white supremacy beliefs. The Klan soon had millions of members nationwide who also intimidated “Catholics, Jews, communists, unionists, immigrants, agitators, and other disrupters of the status quo” (53). A second revival began after World War II. The KKK was hard to defeat; it was a secret society with close ties to local police in the South and elsewhere.

During the mid-1900s, folklorist and journalist Stetson Kennedy crusaded against the Klan, at one point infiltrating it alongside another man. After, they revealed what they learned in a book, The Klan Unmasked.

The KKK was famous for lynchings, but statistics suggest the group was more threatening than murderous. Most lynchings between 1890 and 1970 occurred before the Klan revival of 1915, and the killings fell off every decade thereafter. Early lynchings may have been enough to intimidate millions of African Americans, however: “If a black person violated the accepted code of behavior, whether by talking back to a bus driver or daring to try to vote, he knew he might well be punished, perhaps by death” (57).

In fact, Klansmen weren’t very sophisticated. Kennedy found them “a sorry fraternity of men, most of them poorly educated and with poor prospects, who needed a place to vent” (58), and whose leaders got wealthy off the membership. Still, they were dangerous, and Kennedy sought to bring them down. When a group loses its information advantage, its position weakens, so Kennedy sent information on their secrets—communication codes, command organization, and other tidbits—to major radio programs and newspapers. Soon millions learned about strange KKK offices like the “Exalted Cyclops” and “Imperial Wizard.” The Klan became a mockery; membership declined.

Similarly, in the 1990s the whole-life insurance industry lost its advantage and was forced to lower its prices when insurance price-comparison sites suddenly blossomed online: “the Internet is brilliantly efficient at shifting information from the hands of those who have it into the hands of those who do not” (64).

Many experts nonetheless rely on their information advantage to make extra money. Some hide information that would make them look bad or reveal fraud. A doctor can prescribe a patient an expensive procedure that may not be necessary but will garner the doctor a lot of cash, while the patient fears that not complying will result in untimely death. A car dealer can instill the fear in a customer that an inexpensive car won’t protect the buyer’s family against injuries in an accident as well as a more costly vehicle. A realtor may warn you to take the recent best offer while it’s on the table, which sells your house quickly and adds to the realtor’s financial advantage but not yours. These situations involve “the conversion of information into fear” (69).

Real estate ads use terms that hint at the true asking price. “Well maintained” means old and worn out, but it sounds nice to the seller. “Granite,” “Gourmet,” “Maple,” and “State-of-the-Art” indicate solid homes, while “Fantastic,” “Spacious!” and “Charming” suggest fixer-uppers (71-72). Sellers who know these hints and go online to comparison shop have erased much of the realtors’ knowledge advantage.

Most people hedge on what they know. Job interviewees and people on first dates will skew the truth about their qualifications. Lately, people are more careful to hide their biases, but sometimes they leak out anyway. Trivia game show The Weakest Link, which appeared in the US in the early 2000s, included opportunities for contestants to vote to eliminate one of their number. Since the jackpot grew with correct answers, early votes tended to get rid of bad players, while late-game votes, nearer to the jackpot, tended to remove good players. That aside, Black people and women were treated fairly, but Latinos and the elderly were discriminated against. Contestants believed Latinos were poor players, and contestants didn’t want to be with old people.

People bend the truth about themselves on dating sites. Four percent claim incomes greater than $200,000, whereas only 1% of Americans earn that much. Both men and women report their height as about one inch taller than they really are; women underestimate their weights by 20 pounds. Sixty-eight percent of men and 72% of women say they’re above average in looks; only 1% admit to below-average appearance.

Not posting a picture of oneself severely cuts the number of responses, especially for women. Men respond strongly to good looks; women, to high income. Being overweight penalizes women more than men; shortness and baldness are bad for men; blond hair is much better than salt-and-pepper for women. Half of White women and 80% of White men say race doesn’t matter, but 90% of the men’s responses and 97% of the women’s are to other White people.

Voters often insist they’re colorblind but vote with a bias. David Dinkins, New York City’s Black mayoral candidate in 1989, was ahead by 15% in the polls but, in the election, beat White candidate Rudolph Giuliani by only a few points. When KKK leader David Duke ran for US Senate in Louisiana in 1990, he got 20% more votes than polls predicted. (Duke later was imprisoned for embezzling donations from supporters to feed his gambling habit.)