Freakonomics: A Rogue Economist Explores the Hidden Side of Everything

by Steven D. Levitt

The retest was given a few weeks after the original exam. The children were not told the reason for the retest. Neither were the teachers. But they may have gotten the idea when it was announced that CPS officials, not the teachers, would administer the test. The teachers were asked to stay in the classroom with their students, but they would not be allowed to even touch the answer sheets. The results were as compelling as the cheating algorithm had predicted. In the classrooms chosen as controls, where no cheating was suspected, scores stayed about the same or even rose. In contrast, the students with the teachers identified as cheaters scored far worse, by an average of more than a full grade level.

The incentive scheme that rules sumo is intricate and extraordinarily powerful. Each wrestler maintains a ranking that affects every slice of his life:

Life isn’t very sweet outside the elite. Low-ranked wrestlers must tend to their superiors, preparing their meals, cleaning their quarters, and even soaping up their hardest-to-reach body parts. So ranking is everything.

Each wrestler has fifteen bouts per tournament, one per day over fifteen consecutive days. If he finishes the tournament with a winning record (eight victories or better), his ranking will rise. If he has a losing record, his ranking falls. If it falls far enough, he is booted from the elite rank entirely. The eighth victory in any tournament is therefore critical,

So a wrestler entering the final day of a tournament on the bubble, with a 7–7 record, has far more to gain from a victory than an opponent with a record of 8–6 has to lose.

The most logical explanation is that the wrestlers made a quid pro quo agreement: you let me win today, when I really need the victory, and I’ll let you win the next time.

he solicited customers with a simple pitch: early in the morning, he would deliver some bagels and a cash basket to a company’s snack room; he would return before lunch to pick up the money and the leftovers. It was an honor-system commerce scheme, and it worked.

academics know very little about the practicalities of white-collar crime. The reason? There are no good data. A key fact of white-collar crime is that we hear about only the very slim fraction of people who are caught cheating. Most embezzlers lead quiet and theoretically happy lives; employees who steal company property are rarely detected.

There is far less street crime per capita in rural areas than in cities, in large part because a rural criminal is more likely to be known (and therefore caught). Also, a smaller community tends to exert greater social incentives against crime, the main one being shame.

Feldman has also reached some of his own conclusions about honesty, based more on his experience than the data. He has come to believe that morale is a big factor—that an office is more honest when the employees like their boss and their work. He also believes that employees further up the corporate ladder cheat more than those down below.

Feldman’s bagel business lies at the very intersection of morality and economics. Yes, a lot of people steal from him, but the vast majority, even though no one is watching over them, do not.

The early Klan did its work through pamphleteering, lynching, shooting, burning, castrating, pistol-whipping, and a thousand forms of intimidation. They targeted former slaves and any whites who supported the blacks’ rights to vote, acquire land, or gain an education.

The federal government agreed to withdraw its occupation troops from the South, allowing the restoration of white rule. In Plessy v. Ferguson, the U.S. Supreme Court gave the go-ahead to full-scale racial segregation. The Ku Klux Klan lay largely dormant until 1915, when D. W. Griffith’s film The Birth of a Nation (originally titled The Clansman) helped spark its rebirth.

By the 1920s, a revived Klan claimed eight million members. This time around, the Klan was not confined to the South but ranged throughout the country; this time, it concerned itself not only with blacks but also with Catholics, Jews, communists, unionists, immigrants, agitators, and other disrupters of the status quo.

Yes, the Klan was a secret society, reveling in passwords and cloak-and-dagger ploys, but its real power lay in the very public fear that it fostered, exemplified by the open secret that the Ku Klux Klan and the law-enforcement establishment were brothers in arms.

Stetson Kennedy grew up in a fourteen-room house in Jacksonville, Florida, the youngest of five children. His uncle Brady was a Klansman. But Kennedy would go on to become a self-described “dissident at large,” writing numberless articles and several books that railed against bigotry.

The secret Klan handshake was a left-handed, limp-wristed fish wiggle. When a traveling Klansman wanted to locate brethren in a strange town, he would ask for a “Mr. Ayak”—“Ayak” being code for “Are You a Klansman?” He would hope to hear this response: “Yes, and I also know a Mr. Akai”—code for “A Klansman Am I.”

So it may be that by the mid-1940s, when Stetson Kennedy was trying to bust up the Klan, it didn’t really need to use as much violence. Many blacks, having long been told to behave like second-class citizens—or else—simply obliged. One or two lynchings went a long way toward inducing docility among even a large group of people, for people respond strongly to strong incentives. And there are few incentives more powerful than the fear of random violence—which, in essence, is why terrorism is so effective.

Kennedy also found the Klan to be a slick money-making operation, at least for those near the top of the organization. Klan leaders had any number of revenue sources: thousands of dues-paying rank-and-file members; business owners who hired the Klan to scare off the unions or who paid the Klan protection money; Klan rallies that generated huge cash donations; even the occasional gunrunning or moonshine operation.

Wouldn’t it be nice, he thought, to get the Klan’s passwords and the rest of its secrets into the hands of kids all across the country—and their parents too? What better way to defang a secret society than to make public its most secret information? Instead of futilely attacking the Klan from the outside, what if he could somehow unleash all the secret inside information

Of all the ideas that Kennedy had thought up to fight bigotry, this campaign was easily the cleverest. He turned the Klan’s secrecy against itself by making its private information public; he converted heretofore precious knowledge into ammunition for mockery.

The Ku Klux Klan—much like politicians or real-estate agents or stockbrokers—was a group whose power was derived in large part from the fact that it hoarded information. Once that information falls into the wrong hands (or, depending on your point of view, the right hands), much of the group’s advantage disappears.

But information asymmetries everywhere have in fact been gravely wounded by the Internet. Information is the currency of the Internet. As a medium, the Internet is brilliantly efficient at shifting information from the hands of those who have it into the hands of those who do not. Often, as in the case of term life insurance prices, the information existed but in a woefully scattered way.

One characteristic of information crimes is that very few of them are detected. Unlike street crimes, they do not leave behind a corpse or a broken window.

a doctor may have the same economic incentives as a car salesman or a funeral director or a mutual fund manager: “If you’re an invasive cardiologist and Joe Smith, the local internist, is sending you patients, and if you tell them they don’t need the procedure, pretty soon Joe Smith doesn’t send patients anymore.” Armed with information, experts can exert a gigantic, if unspoken, leverage: fear. Fear that your children will find you dead on the bathroom floor of a heart attack if you do not have angioplasty surgery.

The study found that an agent keeps her own house on the market an average ten extra days, waiting for a better offer, and sells it for over 3 percent more than your house—or

The problem is that the agent only stands to personally gain an additional $150 by selling your house for $10,000 more, which isn’t much reward for a lot of extra work. So her job is to convince you that a $300,000 offer is in fact a very good offer, even a generous one, and that only a fool would refuse it.

So a big part of a real-estate agent’s job, it would seem, is to persuade the homeowner to sell for less than he would like while at the same time letting potential buyers know that a house can be bought for less than its listing price.

Three of the five terms correlated with a higher sale price are physical descriptions of the house itself: granite, Corian, and maple. As information goes, such terms are specific and straightforward—and therefore pretty useful.

“Fantastic,” meanwhile, is a dangerously ambiguous adjective, as is “charming.” Both these words seem to be real-estate agent code for a house that doesn’t have many specific attributes worth describing.

The point here is not that real-estate agents are bad people, but that they simply are people—and people inevitably respond to incentives. The incentives of the real-estate business, as currently configured, plainly encourage some agents to act against the best interests of their customers.

the television game show The Weakest Link provides a unique laboratory to study discrimination.

So, roughly speaking, the typical contestant will vote to eliminate the worse players in the early rounds and the better players in the later rounds.

So who, if anyone, is discriminated against on The Weakest Link? Not, as it turns out, blacks. An analysis of more than 160 episodes reveals that black contestants, in both the early and late rounds of the game, are eliminated at a rate commensurate with their trivia-answering abilities. The same is true for female contestants.

it has become so unfashionable to discriminate against certain groups that all but the most insensitive people take pains to at least appear fair-minded, at least in public.

It’s quite possible that a typical Weakest Link contestant isn’t even cognizant of his discrimination toward Latinos and the elderly

For instance, men who say they want a long-term relationship do much better than men looking for an occasional lover. But women looking for an occasional lover do great. For men, a woman’s looks are of paramount importance. For women, a man’s income is terribly important.

But if you ask enough questions, strange as they seem at the time, you may eventually learn something worthwhile. The first trick of asking questions is to determine if your question is a good one.

So the conventional wisdom in Galbraith’s view must be simple, convenient, comfortable, and comforting—though not necessarily true. It would be silly to argue that the conventional wisdom is never true. But noticing where the conventional wisdom may be false—noticing, perhaps, the contrails of sloppy or self-interested thinking—is a nice place to start asking questions.

Every day there are newspaper pages and television newscasts to be filled, and an expert who can deliver a jarring piece of wisdom is always welcome. Working together, journalists and experts are the architects of much conventional wisdom.

Women’s rights advocates, for instance, have hyped the incidence of sexual assault, claiming that one in three American women will in her lifetime be a victim of rape or attempted rape. (The actual figure is more like one in eight—but the advocates know it would take a callous person to publicly dispute their claims.)

After some wrangling, J. T. promised Venkatesh unfettered access to the gang’s operations as long as J. T. retained veto power over any information that, if published, might prove harmful.

He handed Venkatesh a stack of well-worn spiral notebooks—blue and black, the gang’s colors. They represented a complete record of four years’ worth of the gang’s financial transactions. At J. T.’s direction, the ledgers had been rigorously compiled: sales, wages, dues, even the death benefits paid out to the families of murdered members.

The gang that Venkatesh had fallen in with was one of about a hundred branches—franchises, really—of a larger Black Disciples organization. J. T., the college-educated leader of his franchise, reported to a central leadership of about twenty men that was called, without irony, the board of directors.

Three officers reported directly to J. T.: an enforcer (who ensured the gang members’ safety), a treasurer (who watched over the gang’s liquid assets), and a runner (who transported large quantities of drugs and money to and from the supplier). Beneath the officers were the street-level salesmen known as foot soldiers.

At the very bottom of J. T.’s organization were as many as two hundred members known as the rank and file. They were not employees at all. They did, however, pay dues to the gang—some for protection from rival gangs, others for the chance to eventually earn a job as a foot soldier.

The $5,100 in dues came from rank-and-file members only, since full gang members didn’t pay dues. The extortionary taxes were paid by other businesses that operated on the gang’s turf, including grocery stores, gypsy cabs, pimps, and people selling stolen goods or repairing cars on the street.

Now, here’s what it cost J. T., excluding wages, to bring in that $32,000 per month: WHOLESALE COST OF DRUGS $ 5,000 BOARD OF DIRECTORS FEE $ 5,000 MERCENARY FIGHTERS $ 1,300 WEAPONS $ 300 MISCELLANEOUS $ 2,400 TOTAL MONTHLY NONWAGE COSTS $14,000

So there were indeed some drug dealers who could afford to live large—or, in the case of the gang’s board of directors, extremely large. Each of those top 20 bosses stood to earn about $500,000 a year. (A third of them, however, were typically imprisoned at any time, a significant downside of an up position in an illicit industry.) So the top 120 men on the Black Disciples’ pyramid were paid very well. But the pyramid they sat atop was gigantic. Using J. T.’s franchise as a yardstick—3 officers and roughly 50 foot soldiers—there were some 5,300 other men working for those 120 bosses. Then there were another 20,000 unpaid rank-and-file members,

J. T.’s hourly wage was $66. His three officers, meanwhile, each took home $700 a month, which works out to about $7 an hour. And the foot soldiers earned just $3.30 an hour, less than the minimum wage.