Freakonomics – A Rouge Scientist Explores The Hidden Side of Everything

– Steven D Levitt (Economist) and Stephen Dubner (Journalist)
Genre – Economics, Management

I absolutely loved this book! Levitt is a bright young economist (Harvard, MIT, recognized as one of the most influential economists under 40), who tries to solve every day riddles as a curious explorer wanting to know how the world really works. He is not your typical academic who often make economics a ‘dismal’, boring science with only theory and numbers. But instead brings alive the central tenet of this discipline: If morality is about how humans should behave, economics tells how they actually behave. Moral posturing is replaced by an honest assessment of data to generate new, surprising insights. Levitt co-authors with a New York Times journalist (Dubner) to deliver these deep insights in an engaging and fun story.

So what are these insights?

First, it’s all about incentives. The right incentive will make hallowed professionals like teachers and sumo wrestlers cheat. Levitt runs data on school tests results through a computer aided correlation analysis, and clearly shows that teachers had indeed cheated and given higher scores than students deserved. Just to put the class academic standard in good light. And sumo wrestlers regularly collude and throw away crucial matches to maintain their elite position.

There are also the negative effects of poorly structured incentives. A day care centre was trying to reduce late-arriving parents and instituted a $3 fine. Late arrivals actually increased, as parents were able to ward off their guilt by paying this small fine.

Similarly, conventional wisdom is often wrong. When crime fell in late 1990s in US, everyone came out with logical explanations for this pleasant surprise: gun control laws, roaring economy, policing strategies. However, these were not the main contributor. In reality, 25 years ago, US had legalized abortion causing many potential criminals (kids in very adverse family environment, who likely would have taken up the path of crime) to not even be born. The pool of potential criminals had dramatically shrunk. And yet, none of the experts even mentioned this as a likely cause.

Or, a cold look at data shows that gun control (giving guns only to people with clean credentials) has had limited impact on crime and actually helped a thriving black market. Criminals similarly buy outside the legal system.

The book has many counter intuitive findings. Levitt pairs up with an Indian researcher (Sudhir Venkatesh) to understand the life and organization of drug peddlers (Venkatesh nearly got killed in the experiment but persevered on regardless). And finds sad parallels with the corporate world. The black neighbourhood gangs had a 20-member Board of Directors at the top, earning in millions of dollars, and then 100 Area Heads, earning $0.5m each, but also thousands of foot soldiers (the actual peddlers at the street corners) who earn a pittance (often less than $1000 a year). But these rank and file at the bottom continue to work mainly because of the glamour at the top, much like actors or sportsmen, where the few at the top earn a fortune but the thousands at the bottom and middle earn nothing, except a slim chance to make it to the top.

He also breaks many parenting myths. There is no empirical evidence that kids of intact families do better than those at broken homes. What matters mainly is the socio-economic and education level of the parents, and the number of books at home. Obsessive parenting (playing Mozart tapes, reading to the kids every night, trips to museums), while sounding intellectual, had hardly any effect on the eventual success of the child.

Once you are done with this book, read the next in the series: Super Freakonomics, and be enlightened on even more stimulating subjects.

There are parts of the book one could disagree with. In trying to be popular, Levitt has purposely chosen glamorous and intriguing subjects (the sequel has chapters on Patriotic Prostitutes and Suicide Bombers!) and sometimes over-simplified a complex explanation. There have been criticisms of the accuracy of some of his findings (abortion leading to reduced crime, global warming in Super Freakonomics etc.) and Levitt has himself accepted errors in data analytics in few occasions (though still maintaining that his conclusions hold, even if the link is weaker). But take the book for what it is: a light-hearted exploration directed to make us think.

Why should you read the book: We often believe in popular explanations, but this book will help us develop a deep sense of critical analysis. Trying to question and explore the hidden side of what’s really happening around us. The book can be an excellent primer to economics: a study of human behavior, that can be used so often in life. It should also excite us about data mining to generate insights, which is becoming a big industry in the corporate world.