Freakonomics Summary

Steven Levitt


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Freakonomics Summary

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Freakonomics is a 2005 nonfiction book by economist Steven Levitt and journalist Stephen J. Dubner. The book is a collection of essays exploring how fundamental economic theories can be used to analyze a diverse array of social phenomena.

Chapter one introduces the concept of incentives, which is defined as “a means of urging people to do more of a good thing or less of a bad thing,” and analyzes how different groups have been incentivized to cheat. First of all, however, the book defines the three types of incentives: economic (their actions will change their wealth), social (their actions will affect how others perceive them), and moral (their actions are the result of their sense of right and wrong). The authors explain that many “incentive schemes” combine two or more of these factors to influence behavior.

The two main cheating groups that this chapter looks at are public school teachers and sumo wrestlers. In Chicago public schools, teachers are incentivized to cheat because low test scores can jeopardize the future of the entire school, as well as individual teachers’ careers. For sumo wrestlers, their ranking determines the wages they earn as well as how much they can eat and sleep. These rankings are determined at bimonthly tournaments, where a certain minimum number of wins are required. Contrary to expectations, often times wrestlers with more wins lose to those that require one more win to advance. While there could be bribes (economic incentives) involved, there is also intense moral and social incentivizing at play, as the sumo community is very tight-knit and the stakes of victory are so high.

Chapter two focuses on the theory of information asymmetry in the fall of the Ku Klux Klan and the strategies of modern real estate agents. By the 1940s, while the Klan was no longer as violent as it had been in the past, its mysterious aura and fear rhetoric still held a large sway over the American public. So, a journalist named Stetson Kennedy infiltrated the Klan and disseminated its secrets via a popular radio program, turning mystique into ridicule and dropping its membership drastically. Real estate agents, meanwhile, profit from information asymmetry by utilizing their larger knowledge base to try to get owners to sell faster (inducing fear by implying that there is an issue with the market) or use coded language in the listing (“well maintained” equals old) in order to advertise in a targeted manner to informed buyers or other agents.

Chapter three challenges the conventional wisdom that drug dealing is extremely lucrative, and also compares a drug organization to corporate America. The chapter analyzes a gang, the Black Gangster Disciple Nation, explaining its hierarchy and how profits are distributed. While the top bosses made good money, the rank-and-file members of the gang earned less than minimum wage. Much like large corporations, the highest-ranking members take the lion’s share of profits. This is described as a “winner-take-all” labor market.

Chapter four contains the book’s most controversial material. While other sources theorize that the crime drop in America in the 1990s was due to gun control or increased police presence, the book theorizes that it was actually the legalization and affordability of abortion. Abortions are often procured by women unable to provide for a child, and had those children been born, they would be 50 percent more likely to live in poverty and therefore resort to crime. The book explains an opposite case study, in Romania, where abortion was made illegal. A generation later, crime increased drastically, and the dictator who enacted the ban was killed by youth that may not have been born in its absence.

In chapter five, the book undertakes the role of active parenting. Analyzing data from the Early Child Longitudinal Study (ECLS), containing data from over twenty thousand students, Levitt determines that the factors that most affect a child’s success are not the malleable ones (such as whether the child attends Head Start, or gets read to) but rather the immutable ones (such as the parents’ socioeconomic status, education level and age).

In the sixth and final chapter, Levitt examines whether the name given to a child impacts its life, long-term. Specifically, he examines how racially distinct names may alter a child’s success. In a study, “white names” received many more requests for interviews than “black names” on identical résumés. Distinctly black names do correlate to a lower quality of life, but more because these names more often stem from low-income, low-education households than because of the names themselves. However, the résumé study does indicate that by choosing “white” names over “black” names, society is reinforcing existing stereotypes and perpetuating the black-white achievement gap.

Freakonomics showcases how systems of incentives, information asymmetry, and other economic theories impact culture on a scale much larger than merely economic. By opening our eyes to a host of questions, correlations, and methods, Levitt and Dubner unmask the subtle systems at work that influence how our society operates, from issues as small as how a house is sold to as large as systemic crime.