Freakonomics: A Rogue Economist Explores the Hidden Side of Everything

by Steven D. Levitt

“I’m not good at math, I don’t know a lot of econometrics, and I also don’t know how to do theory. If you ask me about whether the stock market’s going to go up or down, if you ask me whether the economy’s going to grow or shrink, if you ask me whether deflation’s good or bad, if you ask me about taxes—I mean, it would be total fakery if I said I knew anything about any of those things.”

economics is a science with excellent tools for gaining answers but a serious shortage of interesting questions.

experts are human, and humans respond to incentives. How any given expert treats you, therefore, will depend on how that expert’s incentives are set up.

Of all the truisms about politics, one is held to be truer than the rest: money buys elections.

Indeed, election data show it is true that the candidate who spends more money in a campaign usually wins. But is money the cause of the victory?

But just because two things are correlated does not mean that one causes the other. A correlation simply means that a relationship exists between two factors—let’s call them X and Y—but it tells you nothing about the direction of that relationship. It’s possible that X causes Y; it’s also possible that Y causes X; and it may be that X and Y are both being caused by some other factor, Z.

Now picture two candidates, one intrinsically appealing and the other not so. The appealing candidate raises much more money and wins easily. But was it the money that won him the votes, or was it his appeal that won the votes and the money?

Here’s the surprise: the amount of money spent by the candidates hardly matters at all. A winning candidate can cut his spending in half and lose only 1 percent of the vote. Meanwhile, a losing candidate who doubles his spending can expect to shift the vote in his favor by only that same 1 percent. What really matters for a political candidate is not how much you spend; what matters is who you are.

Morality, it could be argued, represents the way that people would like the world to work—whereas economics represents how it actually does work.

Economics is above all a science of measurement. It comprises an extraordinarily powerful and flexible set of tools that can reliably assess a thicket of information to determine the effect of any one factor, or even the whole effect.

Incentives are the cornerstone of modern life.

The conventional wisdom is often wrong.

Dramatic effects often have distant, even subtle, causes.

“Experts”—from criminologists to real-estate agents—use their informational advantage to serve their own agenda.

Knowing what to measure and how to measure it makes a complicated world much less so.

There are three basic flavors of incentive: economic, social, and moral.

(Any incentive is inherently a trade-off; the trick is to balance the extremes.)

If economics is a science primarily concerned with incentives, it is also—fortunately—a science with statistical tools to measure how people respond to those incentives.

In fact, the theme of Smith’s first book, The Theory of Moral Sentiments, was the innate honesty of mankind. “How selfish soever man may be supposed,” Smith wrote, “there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it, except the pleasure of seeing it.”

It is common for one party to a transaction to have better information than another party. In the parlance of economists, such a case is known as an information asymmetry. We accept as a verity of capitalism that someone (usually an expert) knows more than someone else (usually a consumer).

For men, a woman’s looks are of paramount importance. For women, a man’s income is terribly important.

But a woman’s income appeal is a bell-shaped curve: men do not want to date low-earning women, but once a woman starts earning too much, they seem to be scared off.

Mental and physical health may be taxed by child care.

There is also the distress, for all concerned, associated with the unwanted child, and there is the problem of bringing a child into a family already unable, psychologically and otherwise, to care for it.

We have evolved with a tendency to link causality to things we can touch or feel, not to some distant or difficult phenomenon.

when the government gives a woman the opportunity to make her own decision about abortion, she generally does a good job of figuring out if she is in a position to raise the baby well. If she decides she can’t, she often chooses the abortion.

Fear is in fact a major component of the act of parenting. A parent, after all, is the steward of another creature’s life, a creature who in the beginning is more helpless than the newborn of nearly any other species. This leads a lot of parents to spend a lot of their parenting energy simply being scared.

Separating facts from rumors is always hard work, especially for a busy parent. And the white noise generated by the experts—to say nothing of the pressure exerted by fellow parents—is so overwhelming that they can barely think for themselves.

“is that the risks that scare people and the risks that kill people are very different.”

“Risks that you control are much less a source of outrage than risks that are out of your control,”

But fear best thrives in the present tense.

Risk = hazard + outrage.

“When hazard is high and outrage is low, people underreact,”

“And when hazard is low and outrage is high, they overreact.”

Correlation is nothing more than a statistical term that indicates whether two variables move together.

In a perfect world, an economist could run a controlled experiment just as a physicist or a biologist does: setting up two samples, randomly manipulating one of them, and measuring the effect. But an economist rarely has the luxury of such pure experimentation.

What an economist typically has is a data set with a great many variables, none of them randomly generated, some related and others not. From this jumble, he must determine which factors are correlated and which are not.

A regression analysis can demonstrate correlation, but it doesn’t prove cause. After all, there are several ways in which two variables can be correlated. X can cause Y; Y can cause X; or it may be that some other factor is causing both X and Y.

Here is the conundrum: by the time most people pick up a parenting book, it is far too late. Most of the things that matter were decided long ago—who you are, whom you married, what kind of life you lead. If you are smart, hardworking, well educated, well paid, and married to someone equally fortunate, then your children are more likely to succeed.

The implication is that black-sounding names carry an economic penalty.

The data show that, on average, a person with a distinctively black name—whether it is a woman named Imani or a man named DeShawn—does have a worse life outcome than a woman named Molly or a man named Jake. But it isn’t the fault of their names.

His name is an indicator—not a cause—of his outcome.

The girls’ names are in most regards diverse, though with a fair share of literary and otherwise artful touches.

A caution to prospective parents who are shopping for a “smart” name: remember that such a name won’t make your child smart; it will, however, give her the same name as other smart kids—at least for a while.

once a name catches on among high-income, highly educated parents, it starts working its way down the socioeconomic ladder.

So where do lower-end families go name-shopping?

Parents are reluctant to poach a name from someone too near—family members or close friends—but many parents, whether they realize it or not, like the sound of names that sound “successful.”

What the California names data suggest is that an overwhelming number of parents use a name to signal their own expectations of how successful their children will be. The name isn’t likely to make a shard of difference. But the parents can at least feel better knowing that, from the very outset, they tried their best.

You might become more skeptical of the conventional wisdom; you may begin looking for hints as to how things aren’t quite what they seem; perhaps you will seek out some trove of data and sift through it, balancing your intelligence and your intuition to arrive at a glimmering new idea. Some of these ideas might make you uncomfortable, even unpopular.

if morality represents an ideal world, then economics represents the actual world.