Freakonomics Review
Freakonomics – a study of the plausibility of probabilities
Economics – the ‘queen of the social sciences’ - is conventionally considered the study of ‘the production, distribution and consumption of goods and services’, but however the last decades has seen an expansion in the applicability of economic analysis to diverse fields, some of them rather surprising. Freakonomics is one of the most notable recent books that has demonstrated the power and scope of economic analysis, as applied to the transactional incentives for humans and societies – ranging from Sumo wrestlers to the Ku Klux Klan!
Who wrote it?
The book is a narrative of the desultory yet incisive analysis of a “rogue” economist Steven Levitt, co-written with the New York Times journalist Stephen J. Dubner. Released in 2005, through an innovative viral campaign in the blogosphere, the book has already achieved wide readership – already having sold 3 million copies by 2007! Levitt – the Indiana Jones of economists – in recent years has garnered a reputation for his off-beat theories wrought out of his brilliant insight and bold answers derived from data and numbers. For example, in 1999 he stirred up a furor when his scientific papers that proposed a causative link between abortion and crime hit the mainstream media. In this book, he explores several aspects of pop culture through the unexpected tools of economic microanalysis and takes the reader on a fascinating walk through the data-fields of several seemingly impenetrable and off-topic issues, littered with landmines of specious conclusions, but carefully emerging on the other side with a harvest of insightful results and a lingering skepticism about accepted conventional wisdom.
Levitt attracts mixed reaction from his academic peers; some of them unwilling to classify his work as economics because he deals in areas (like parenting and baby names) that have never been under the purview of prior work in the field. Dubner writes, “His abiding interests – though he says he’s never trafficked in them himself – are cheating, corruption and crime.” He essentially has distilled the primary goal of his science to elucidate the machinations of how people get what they want. A striking feature of his ratiocination is his readiness to artfully use his personal observations and intuitions, and through a collage of data-mining & anecdote-telling, manage to derive results on entities that veterans in the field have so far considered unmeasurable. Normally, economics deals with hundreds of covariant variables and parameters and requires tedious mathematical analysis of reams of numbers and statistics. However, Levitt’s blazing curiosity (and Dubner’s reportage) provides him with the intuition to transcend the rigorous math and emerge onto a plane that renders them interesting and useful to laymen, which has been evidenced by the support and encouragement of thousands of New York Times readers and subsequent Freakonomics blog-readers. This propels the notion of the modern era that although the world is rife with confounds, confusions and even deceit, it is not ultimately impenetrable given we ask the right questions with the right tools. His numbers-don’t-lie belief and his erudite training has won him acclaim and recognition – he was inducted into the prestigious Society of Fellows at Harvard at the age of 26, with most resident experts sure of his competence but unsure of what to call his expertise.
What’s in it?
The authors disclaim the book from having any “unifying theme” and therefore, follow a “treasure hunt” approach to go where Levitt’s curiosity takes them, with the aim of uncovering “the hidden side of everything”. Some topics are:
- The foreboding of the ‘superpredator’ crime wave in the States in the 90s and its subsequent failure to materialize despite expert’s fervent forecasting. Is legalized abortion the cause?
- How real-estate agents are similar to the Klu Klux Klan? (The incentives of lying.)
- How are public school teachers in the US like Sumo wrestlers in Japan? (The incentives of cheating.)
- The workings of crack gangs in urban ghettos in the States, and why do most drug dealers live with their mothers?
- What’s in a name? Is there a discernible link between the probability of success in life and one’s name? Why do parents choose certain names for their children?
- How much do parents affect the outcome of a child’s growth? Obsessive parenting formulae and their ineffectiveness. What makes a perfect parent?
Clearly, the book is unafraid to touch upon a wide set of politically charged topics. Despite the claim that there is no unifying theme to the book, I tend to think that actually there is one. Dubner and Levitt state that, “Morality represents the way that people would like the world to work – whereas economics (through data) represents how it actually works.” While the book might be too diffuse in its topics to qualify for scientific scrutiny directly, it provides laymen with a revealing introduction to the basic process of how people behave, and therefore, transactional incentivisation of risk would be my vote for the basic theme of the book.
How does it go?
The first chapter, I believe, is to introduce the reader to the sensibilities of Levitt’s approach. It essentially provides a synopsis of a few startling and some understandable conclusions that nullify “conventional wisdom”. Most experts expected a massive crime wave that would “throw society into chaos” in the 90s. But it was a phantom: the crime wave never came. This has puzzled observers a good deal, but Levitt traces the reason to a single Supreme Court ruling about abortion back in the 70s. This may be a political hotbed, but Levitt is unafraid to go where the data takes him. He shows how “dramatic effects often have distant, even subtle, causes.” – Like the ‘butterfly effect’ in chaos theory. Saving up the details for later, he skips to the issue of how professionals – real estate agents, car mechanics – have personalized incentives in not giving you the best deals possible. This would hardly come as a major surprise, but my guess is that most people would not be able to pinpoint the actual dynamics of why and how this is so. Levitt gracefully does so. Next he takes on the truism of “money wins elections” and seeks to show that this is a fallacy, due to the innate tendency of the candidate’s images in a contest to stack up the odds differently between them. He pulls a rabbit out of the hat: “A winning candidate can cut his spending in half and lose only 1 percent of the vote”.
The basic point he makes however, is that “Incentives are the cornerstone of modern life” but “conventional wisdom is often shoddily formed and devilishly difficult to see through, but it can be done. Identifying what to measure and how to measure it makes a complicated world seem less so.”
The subsequent chapters form the core of the book in dealing with the bizarre yet curious topics stated earlier. Dubner’s literary panache sets the course for an interesting ‘storyline’, providing historical info, teasing the reader with confounding questions and translating the rigorous methodology into a set of cogent arguments, while waylaying the championed claims of conventional wisdom. This is the primary reason why a book of such lofty, erratic ambitions and intricate analysis manages to please like a well-told riddle, and brings a smile to the reader’s face almost as if one is watching a precocious smart-aleck student artfully trump the veteran teachers.
However, one must be wary of this iconoclasm so as not to read more than what the authors intend to say. For the most part, they have made it quite easy – drawing perhaps from their histories of journalistic balance and scientific focus – as they steer clear of making judgments or policy recommendations; perhaps feeling that resolving political controversies is irrelevant to their intellectual swashbuckling. I think they are right in delegating moral judgments to the reader (and hence the people), while only choosing to resolve the conundrums of the complex data of the society that the reader inhabits. I would not be surprised if the objective paradigm of their analysis engenders a genre of further research, books and public debate.
Several of their examples intrude upon topics that are both crucial and sensitive to several sets of people. They decide to scrutinize situations for fraud where the perpetrator is a figure of authority/honor, and therefore difficult to catch. A public school teacher is the authority in her classroom with the duty of educating the students in an honest environment. But how does one detect his/her misdeeds? Unlike a regular investigator, Levitt conducts no interviews. Instead, in a typical economist’s fashion, he takes up years of data from the education commission about classroom test results. His intuition for asking the right question shows: he sets up a problem that involves searching for patterns in the data and sets up intelligent clauses to eliminate counter-conditions. It is fortunate that his predictions are able to be tested against reality, because the problem was first brought to him by the head of the commission. Therefore, they devise a controlled, actionable experiment by retesting the exams in schools, which eventually led to the dismissal of several teachers in Chicago. Another study involved checking for instances of match-fixing amongst Sumo wrestlers. Sumo Wrestling is a national sport in Japan, and is steeped in honor and respect. Any untoward allegations are met with avid opposition. However, Levitt’s analysis (of years of match fixture outcomes) makes a pretty strong case for the occurrence of cheating. He even draws up reports of a rather suspect case of two whistleblower Sumo wrestlers who died mysteriously in the same hospital on the same day. I gather the Sumo Wrestling community still denies any allegations of foul play about the whole matter. However, this is another example of Levitt’s work rendering a real effect on the world through the resultant public interest. It is stated that his personal desire is to be able to catch terrorists and miscreants by intelligently working through the numbers, and one is left with an optimistic estimate about the enterprise: Numbers don’t lie.
In the next chapter, Levitt looks at the incentives of information hoarding in group identity and advantage. Clinical as that may sound, the chapter is a joy to read, simply for the interesting historical narrative and anecdotes it provides. The two unlikely groups that they draw a parallel between are the Klu Klux Klan (a white supremacy secret society in the USA during the times of segregation) and modern day real-estate agents, salesmen and Enron traders! The narrative is derived from some interviews with Stetson Kennedy, the man imputed with the dissipation of the KKK in the face of a possible resurgence of racist zeal. They argue that the KKK was effective in its ability to rouse fear/dread amongst the black population not by using violence, but by information hoarding. Contrary to popular belief, he demonstrates, the amount of lynching and crimes against blacks was on a constant and rather rapid decrease. The proposition is that in reality, the KKK through its initial violence had established a strong incentive against rebellion, and had further fortified their group identity via secret codes, rituals and passwords.
What does this have to do with modern traders? They draw a parallel: “the KKK was a group whose power – much like that of politicians or real-estate agents or stockbrokers – was derived in large part from the fact that it hoarded information.” The comparison is nicely established, in that, they consider the method of downfall of both the KKK as well as previously unchecked merchants/traders. The coming of the Internet to consumers has led to a never-before dilution of the information barrier about products and prices. This is evidenced by the all-round, and rather rapid, drop in prices for commodities that became easily available on the internet. Similarly, the KKK suffered a huge blow when Kennedy cunningly released all its secret codes & information over an Adventures of Superman radio show, which led to kids running around donning white capes, thus shaming the idea of their father’s secret society. “Information is a beacon, a cudgel, an olive branch, a deterrent, depending on who wields it and how”, they sagaciously demonstrate using the example of the day-old-car effect. They go on to include employees in Enron & Merrill Lynch, expensive cardiologists, real-estate agents and other groups to be involved in the same scheme of incentivisation through information hoarding.
The chapter remains fairly interesting as they explore cases of information denial that is not the domain on only experts, but common people. How? Voters, game show contestants and dating websites provide a plethora of data which is put to good use: by looking for patterns in the numbers that belie the difference between opinion and action. Of course, it came as no surprise to me that people lie on dating websites either in the form of exaggerating their assets or misrepresenting their true preferences in order to be seen as politically correct. But, the analysis is reassuring.
The next chapter moves the scene to the gang-ridden urban black ghettos of Chicago. Why do drug dealers still live with their mothers? But first, they discuss the idea of conventional wisdom – original use of the phrase was not as a compliment. That wisdom is developed through the agent of both journalists and experts, or advertising. For example, “Listerine did not make mouthwash as much as it made halitosis” (obscure medical name for bad breath), as one scholar wrote. Thus, conventional wisdom is setup by several means, but once established it can be quite hard to budge. With this in mind, they turn to the problem of drug-related crimes in urban housing projects in the 90s. They have an extremely interesting vantage point into the problem – Sudhir Venkatesh, then a grad student of Indian origins at the University of Chicago and now a professor at Columbia University. He managed to infiltrate, befriend and live with a particular black gang, just one of hundreds that dealt in crack-cocaine. The narrative and anecdotes of the story that ensue is gripping and extremely interesting to read. Who wouldn’t be voyeuristically interested in the workings of a black crack-cocaine gang in the city? Especially when the conclusion is that, again contrary to popular belief, crack dealers were nowhere close to making tons of money, and actually worked in the same way as a MacDonald franchise! Without giving anymore details of the plot away, I must say that it’s stimulating, yet somehow pleasing, to see how a study of these gangs draws out similarities in the nature of human enterprise for profits and personal advancement. In there lies a good reminder for the multitude of people who complain about the soul-crushing or “grunt jobs”, even in second-tier glamour professions without a clear idea of the sort of pyramid structure they inhabit.
I would say that this chapter is the high-point of the book, as it transitions from a gripping narrative of Sudhir’s gang infiltration into the chronicling of the entrance of crack cocaine into the US market. The concomitant increase in drug-related violence seemed to grip the cities fear and imagination, with speculations of “bloodbaths” turning into forecasts of widespread chaos. This was the phantom crime wave that never came, but in fact curiously and inexplicably, ebbed out to crime levels lower than before. As a child of the nineties, I find it interesting to note how distant, quite unrelated decisions made a few decades earlier could affect dramatic changes then. Levitt and Dubner again start off at a tangentially related historical narrative: communist Romania in the 60s as it banned abortion, in what was previously a liberal place for the same. The story of abortion in Romania might seem an odd way to start the story of American crime in the 1990s, but they show how it provides a reverse image of the same story – a valuable countercheck.
The authors are consistent in warning us about confusing causality and correlation, as most scientists learn in their career. While there are several championed reasons for the drop in crime, not all of them might be valid. Levitt explores these with clarity and force, after all, this having been a part of his earlier scientific work and diligently counters them with insightful readings of the data. The analysis is long, detailed and interspersed with anecdotal digressions – a good blend with Dubner’s background – but is well worth it if one wishes to understand the link between abortion and crime. The story runs from crack cocaine to Columbian drug barons to Gun control laws to NY mayor elections and more, deftly picking up the required details for establishing a good question. In the search for a better answer, he comes to the Roe vs. Wade court case in the 70s, a remarkable case because it was really only a young mother who was pregnant again and did not wish to deliver a child. However, the powers-that-be led this to a Supreme Court hearing which overturned the earlier ban, and allowed legalized abortion in most states (subsequently). Levitt argues – from the data, and apparently sensitive to the moral and political charge of the question – that more the number of young poor women able to choose abortion legally, the lesser the number of babies being born into a socio-economic condition that is thoroughly, and positively correlated to being conducive to criminalism. What does this mean? Did the poor, uneducated black (or otherwise) teen girls from the 70s to the 90s essentially purge a generation of possibly criminal lives? Such socially (and academically) interesting questions make the chapter a meaty, and juicy read.
Working along a related theme, the rest of the two chapters discuss the role that family and socio-economic environment has on children, and particularly, do parents really matter in a child’s development? Just how much would be hard to measure, but they attempt to measure it. The issue of parenting has become a heavily loaded topic in recent decades, and a lot of “obsessive parenting techniques” abound in the populace.
Again, informative data and insightful questions reveal certain interesting facts about parenting: reading aloud to your child seems to make no difference to their abilities, but having books in the house does. Once again it is revealed to me, how intricate and subtle a topic is the study of probabilities; most people usually can’t judge probabilities very well and that’s where an economist’s dexterity with information allows them to put numbers on sublime probabilities. Parents would be interested to know that your child playing at a friend’s house is a lot more likely to be killed in a house that has a pool than a house that has a gun! There is a lot of light-shedding and intelligent iconoclasm in the chapter for interested parents: the nature vs. nurture debate, safety and fear-mongering, parental education, etc. If numbers don’t lie, then perhaps all the new-age parenting literature is being over-eager?
A big section of this research is supported by the involvement of Dr. Roland G. Fryer Jr., a young black Harvard economist who is a reputed scholar on the black community identity and development in the United States, himself having come from a shaky childhood. The chapter is intricate, with lots of sub-plots and themes, and is interesting to anybody with an interest in the empirical evidence of the effect of childhood conditions on one’s probability of success. The next chapter – another one related to parents – asks questions about why and how parents name their children, and if it makes a difference in how the children grow up to be perceived.. Dipping right into the pool of human absurdity, we receive several hilarious (and some perturbing) stories of names people have given their children: Winner, Loser, Shithead and several more! The data-driven approach uses a rather special dataset – the demographic birth certificate records – and considers the emergence of the most popular names for the last few decades. He goes so far as to try and predict what the most popular choice of baby names will be (for both the educated and the poor quarters) in 2015!
This chapter seemed somewhat slow, but in no sense, really strayed from the principles set out in the first chapter. Although at certain points it seemed that the data was incomplete: for example using the mother’s information but not the father’s. I suppose the question still contains academic merit for sociology and parent psychology, but as with every other chapter, the trivia and factoids in themselves are entertaining enough. In fact, the book itself would almost be worth it just for its anecdotes and facts… but when used as a story-telling device by an economist, in using the ‘rational utility-maximization’ principle, elevates it to a treatise of social, political and perhaps even moral interest and relevance. The ending is strategic in its brevity, with a stunning example where human randomness meets the dependability of data, thus leaving a reminder to keep an open mind.
So finally…
The book is particularly effective as it leaves one with a lingering sense of skepticism about the “common sense” and “conventional wisdom” which we readily use, abet and subvert on a daily basis. This, to me, is a sign of a book that has the potential to be an intellectual fountainhead for the future. However, there are some reports of experts calling the data Levitt used into question and as he himself warns us about the actual nearness between causality and correlation. But to settle those issues would be beyond the purview of this review, suffice to say that the book’s ability to engage a thought-provoking, elegant and objective argument is already the hallmark of a scientific endeavor, and might do good to inspire some more. I’m certain that Freakonomics will do, if not already, a great amount of good in the cause of economics being recognized as scientifically relevant to the average person in a modern world and upping the ante of what future economists, sociologists and mathematicians dare to question in the spirit of free enquiry.
posted by Arjun @ 7:59 PM
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