Think Like a Freak

by Steven D. Levitt

We wrote this book to answer that sort of question. It strikes us that in recent years, the idea has arisen that there is a “right” way to think about solving a given problem and of course a “wrong” way too. This inevitably leads to a lot of shouting—and, sadly, a lot of unsolved problems. Can this situation be improved upon? We hope so. We’d like to bury the idea that there’s a right way and a wrong way, a smart way and a foolish way, a red way and a blue way. The modern world demands that we all think a bit more productively, more creatively, more rationally; that we think from a different angle, with a different set of muscles, with a different set of expectations; that we think with neither fear nor favor, with neither blind optimism nor sour skepticism. That we think like—ahem—a Freak.

Incentives are the cornerstone of modern life. And understanding them—or, often, deciphering them—is the key to understanding

The economic approach is both broader and simpler than that. It relies on data, rather than hunch or ideology, to understand how the world works, to learn how incentives succeed (or fail), how resources get allocated, and what sort of obstacles prevent people from getting those resources, whether they are concrete (like food and transportation) or more aspirational (like education and love).

One reason is that it’s easy to let your biases—political, intellectual, or otherwise—color your view of the world. A growing body of research suggests that even the smartest people tend to seek out evidence that confirms what they already think, rather than new information that would give them a more robust view of reality.

It’s also tempting to run with a herd. Even on the most important issues of the day, we often adopt the views of our friends, families, and colleagues. (You’ll read more on this in Chapter 6.) On

Another barrier to thinking like a Freak is that most people are too busy to rethink the way they think—or to even spend much time thinking at all.

What’s wrong with that? When people don’t pay the true cost of something, they tend to consume it inefficiently.

For most people, it is much harder to say I don’t know. That’s a shame, for until you can admit what you don’t yet know, it’s virtually impossible to learn what you need to.

On its own, this is problem enough. But the stakes get higher when we routinely pretend to know more than we do.

“Why Most Economists’ Predictions Are Wrong.”

MODERATOR: Tonight, our guest: Thomas Sargent, Nobel laureate in economics and one of the most-cited economists in the world. Professor Sargent, can you tell me what CD rates will be in two years? SARGENT: No. And that’s it. As the Ally announcer points out, “If he can’t, no one can”—thus the need for an adjustable-rate CD. The ad is a work of comic genius. Why? Because Sargent, in giving the only correct answer to a virtually unanswerable question, shows how absurd it is that so many of us routinely fail to do

Unfortunately, this fact is routinely ignored by those who engage in—take a deep breath—ultracrepidarianism, or “the habit of giving opinions and advice on matters outside of one’s knowledge or competence.”

If the consequences of pretending to know can be so damaging, why do people keep doing it? That’s easy: in most cases, the cost of saying “I don’t know” is higher than the cost of being wrong—at least for the individual.

The incentives to fake it are simply too strong.

When bad predictions are unpunished, what incentive is there to stop making them? One

But when it comes to solving problems, one of the best ways to start is by putting away your moral compass.

The key to learning is feedback. It is nearly impossible to learn anything without it.

reason is tradition. In our experience, many institutions are used to making decisions based on some murky blend of gut instinct, moral compass, and whatever the previous decision maker did.

When you buy a bottle of wine, do you sometimes base your decision on how pretty the label is? According to Robin Goldstein’s results, this doesn’t seem like a bad strategy: at least it’s easy to tell labels apart, unlike the stuff in the bottle.

When you ask the question differently, you look for answers in different places.

Here is the broader point: whatever problem you’re trying to solve, make sure you’re not just attacking the noisy part of the problem that happens to capture your attention. Before spending all your time and resources, it’s incredibly important to properly define the problem—or, better yet, redefine the problem.

Japanese TV reporter asked him how he felt. “I can keep going,” Kobi said.

Thinking like a Freak means you should work terribly hard to identify and attack the root cause of problems.

Because poverty is a symptom—of the absence of a workable economy built on credible political, social, and legal institutions.

If you meet someone who fancies himself a thought leader or an intellectual, one of the nicest compliments you can pay is to call him a “big thinker.” Go ahead, try it, and watch him swell with pride. If he does, we can virtually guarantee you he has no interest in thinking like a Freak.

Statistical Abstract of the United States (the kind of book economists leaf through for grins).

Albert Einstein liked to say, everything should be made as simple as possible, but not simpler. This

But if they’ve somehow convinced themselves that running regressions or interviewing strangers is the funnest thing in the world, you know they have a shot.

“is really trying to figure out how the trick works, because that’s what you’re doing as a kid—trying to figure out

Like most economists, he believed he could solve any problem by setting up the right incentives.

there is one mantra a Freak lives by, it is this: people respond to incentives. As

Understanding the incentives of all the players in a given scenario is a fundamental step in solving any problem.

Let’s begin with the most obvious incentive: money.

When it comes to financial incentives, size matters.

The key is to learn to climb inside other people’s minds to figure out what really matters to them.

(Thus the old saying: Don’t listen to what people say; watch what they do.) Furthermore,

But a Freak wouldn’t put it that way. Instead, you’d simply observe that people are complicated creatures, with a nuanced set of private and public incentives, and that our behavior is enormously influenced by circumstances.

The most radical accomplishment of once-and-done is that it changed the frame of the relationship between the charity and the donor.

Whenever you interact with another entity, whether it’s your best friend or some faceless bureaucracy, the interaction falls into one of a handful of frameworks. There’s the financial framework that governs everything we buy, sell, and trade. There’s an “us-versus-them” framework that defines war, sports, and, unfortunately, most political activity. The “loved-one” framework covers friends and family (at least when things are going smoothly; otherwise, look out for “us-versus-them”). There’s a collaborative framework that shapes how you behave with work colleagues or in your amateur orchestra or pickup soccer team. And then there’s the “authority-figure” framework, in which someone gives instructions and someone else is expected to follow them—think of parents, teachers, police and military officers, and a certain kind of boss.

Whether through subtle cues or concrete incentives, a lot of problems can be solved by shifting the dynamic between parties, whether it’s two people or two billion.

Voilà! The financial framework had been recast as a collaborative one, leaving all parties—and most especially the Soccer Boys and Girls of the world—in better shape.

As Mark Twain once wrote: “[T]he best way to increase wolves in America, rabbits in Australia, and snakes in India is to pay a bounty on their scalps. Then every patriot goes to raising them.”

But if there is one thing we’ve learned from a lifetime of designing and analyzing incentives, the best way to get what you want is to treat other people with decency. Decency can push almost any interaction into the cooperative frame. It is most powerful when least expected, like when things have gone wrong. Some of the most loyal customers any company has are the ones who had a big problem but got treated incredibly well as it was being resolved.

Figure out what people really care about, not what they say they care about. Incentivize them on the dimensions that are valuable to them but cheap for you to provide. Pay attention to how people respond; if their response surprises or frustrates you, learn from it and try something different. Whenever possible, create incentives that switch the frame from adversarial to cooperative. Never, ever think that people will do something just because it is the “right” thing to do. Know that some people will do everything they can to game the system, finding ways to win that you never could have imagined. If only to keep yourself sane, try to applaud their ingenuity rather than curse their greed.

And so it was that David Lee Roth and King Solomon both engaged in a fruitful bit of game theory—which, narrowly defined, is the art of beating your opponent by anticipating his next move.

person who is lying or cheating will often respond to an incentive differently than an honest person.

separating equilibrium). The

Spanish Prisoner.

Anecdotes often represent the lowest form of persuasion.

So it is always worth questioning what a story is based on, and what it really means.