Freakonomics

SUMMARY

Freakonomics is about applying simple economics concepts in our everyday lives, asking questions nobody else thought, and finding answers not imagined by anyone. It's a simple yet provocative work at times borders on challenges faced by racism in America. It brings in a detective mindset to unravel some seemingly obvious questions with insightful revelations.

 "….. Turns everything you once thought to be true inside out. Prepare to be dazzled" – Malcolm Gladwell.

 Steven Levitt introduces various themes with a warning that you might not find a common underlying theme,

Key Insights

We will look at two independent themes of Incentives and Information Asymmetry as to how it plays out

1.   Incentives  

A set of Incentives drives every action of what We Do or Don't. It's inherently ingrained in our upbringing to respond to incentives. Be it getting your kid to do her homework, wake up on time etc.

The Author breaks Incentives into various categories by which you Take or Don't Take a course of action 

• Economic Incentives     Reward or a penalty.
• Social Incentives           How people judge you
• Moral Incentives           Moral compass drives behavior.

Levitt uses an example of how economists tried to find a solution for parents turning late to pick up their kids by levying a $3 fine on parents for late Pickup. Instead of reducing, late pickups increased!

How do you see this?

Earlier, parents used to have a Societal Incentive, felt obligated and guilty with late pickups, and the introduction of penalty felt no longer so. They felt they could buy extra time by paying the penalty and without feeling bad about it.

While Author dwells on nuances of Incentives with a structure tries to bring clarity, it can also be argued that if the penalty was designed and positioned in such a way and integrated with a Social and Moral Incentive, this would have maybe been more successful.  

Failure, in this case, lies in just relying on economic penalty and not driving the behaviour through Social and Moral Incentives. Besides Penalty if the thrust was on bringing out how late Pickup is creating challenges for Kids and how they feel lonely when other kids get picked up on time would have made a big impact. 

2.   Information Asymmetry

We can see this play out when in a transaction or a grouping; one party has access to information that others don’t, invariably leading to manipulation of decisions in eliciting a particular behavior

Imagine how often we tell stories to our kids that are not true. As a parent you hold information advantage and benefit in driving a particular behaviour from your kid.

Of Course, today's kids overcome this much faster than you anticipate ????

Story of Real Estate Agent's 

We all hire a real estate agent when we intend to sell a house or buy a house etc. Economic Incentive for the agent is percentage of the sale value.

The question is, why is it not in our best interest?

Real estate agent has no Economic Incentive to wait for the best price. In most cases, it's a fixed percentage of the sale value, in most cases does not see the economic incentive to scout for a better price. (For him the Incremental incentive over the base price he makes only the small proportion)

To make you accept the current offer, he resorts to favourite tactics of Fear, and builds a narrative as to why you are lucky and should just accept the deal. While his message may be subtle, you fall for the Fear and succumb to settling the deal quickly for fear of missing out on what's on the table.

The "Bird in Hand" analogy starts playing out in your head and makes you accept.

Economic Incentives will not play out in securing the best outcome when you are at an information disadvantage. Its critical to develop an understanding or make peace with the fact that you stand a good chance of being short-changed.

What Else ?

Freakonomics is about questions, seeing patterns in everyday situations, and deriving linkages. It Provokes you to ask lots of questions, most of which you might not find great answers to, but some of them will reveal patterns that you have been missing.

Incentives and Cheating by Teachers and Sumo Wrestlers? 

If drug peddling is economically lucrative, why most live in average conditions?

What makes a perfect Parent?

What’s the mysterious reason for crime drop in New York?

You will find interesting answers to the above and many more questions which author addresses, as you read Freakonomics, it will make you think.