Frekonomics Final Review

7/27/2019 Frekonomics Final Review

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Freakonomics book

review.

By:-

Harinesh Pandya 12079

Himanshu singh Gurjar 12080

Jigar shah 12081

Kamalesh C. J 12082

Kopparapu Srivatsa 12083

Kritika Baghel -12084


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Introduction:-

Economics deals with the daily life activities. Once we study economics we feel

like relating every activity of life to it.In this context the book Frekonomics brings out more

insights into this.In simple terms it means the inner side of everything.The author S.D .Levitt

and S.J.Dubner have successfully infused the curiosity in the reader by posing questions

like:-

What do schoolteachers and sumo wrestlers have in common?

How is the Ku Klux Klan like a group of real-estate agents?

Why do drug dealers still live with their moms?

Where have all the criminals gone?

What makes a perfect parent?

Would a roshanda by any other name smell as sweet?

By the above questions we feel that the authors made an out of the box

thinking and tried to infuse the same in the readers. In Freakonomics, Levitt and his co-

author, journalist Stephen Dubner, offer a survey of some of the most interesting researchtopics Levitt has tackled during his career. The authors have touched every walk of life

through their research and gave out startling facts which a normal person cannot believe. The

contrasting topics they choose to discuss like school teachers, sumo wrestlers, real estate

agents, criminals, parents and even to the extent of children names will surely give a new

perspective to study of economics.

There is no one common theme to the book, in which Levitt uses economic and

statistical tools to look at areas such as The Ku Klux Klan, cheating in Sumo wrestling and

why your real estate agent isnt really interested in getting you the highest possible price on

the house youre selling.Rather the books central message is how far you can go by looking

at the numbers and that you must keep an open mind to some of the startling and counter-

intuitive realizations that might bring you. Reading this book is an unbroken string of Aha-

experiences, where common sense thinking is shown to be just plain wrong.

This has got to be the most entertaining and eye-opening book on economics Ive ever

read. Can you apply anything from the book directly to your endeavours? Probably not. But it

gave me a sense that the world is more complex than common sense would dictate. And that

by looking at what is actually going on, rather that just running on the usual assumption, you

can actually get a better, more accurate understanding og the world one that is simple in its

complexity

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The book revels around the four fundamental ideas of :-

Incentives are the cornerstone of modern life.

Conventional wisdom is often wrong.

Dramatic effects often have distant, even subtle, causes.

Experts use their informational advantage to serve their own interests.

It is true that readers of this book will be armed with enough riddles and stories to last

a thousand cocktail parties. But Freakonomics can provide more than that. It will literally

redefine the way we view the modern world.They consider questions such as how to

determine if teachers are aiding in students' cheating on standardized tests, the impact ofinformation asymmetry on the operation of the Ku Klux Klan, how the organizational

structure of crack gangs resemble other businesses, and the influence of parents on child

development.

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What do school teachers and sumo

wrestlers have in common?

Economics is the study of incentives. This chapter studies about how these incentives affect

the decisions of an individual and the economy as a whole. Incentive is simply a means of

urging people to do more of a good thing and less of a bad thing. Each and every person

responds to incentives negative and positive. There are three varieties of incentives namely

economic, social and moral. The author uses mainly three cases to explain the effects of

incentive that of cheating by school teachers, sumo wrestlers and bagel business.

The author begins to explain about incentives with the help of Israeli day care centre. To

overcome the problem of late pick-ups at the day care centre, the economists suggest to

impose a fine of $3 as economic incentive but the number of late pick-ups did not reduce as it

could not substitute the moral incentive. A reverse case of blood donors is also given wherein

moral incentive is replaced with economic incentive.

The case of cheating by school teachers shows the economic incentive substituted for moral

incentive. The author speaks about the system of high stakes followed by Chicago Public

Schools. The stakes are considered high because instead of simply testing students to measure

the progress, schools are increasingly held accountable for the results. The higher scores of

students helped the teachers to earn additional income through bonus and the like. The system

was aimed at providing as an incentive to students but it acted as an incentive to the teachers.

It motivated the teachers to cheat by manipulating the results of the students and was revealedby retests.

Sumo wrestling, a premier sport of Japan is also alleged of rigging. The incentive scheme that

rules sumo is intricate and extraordinarily powerful. Each wrestler maintains a ranking that

affects every slice of his life: how much money he makes, how large an entourage he carries,

how much he gets to eat, sleep, and otherwise take advantage of his success. 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 Ill let you win the next time. The sumo wrestlers enter a win-

win situation by a mutual agreement.

Another case of bagel business by Paul Feldman explains the white collar crime. Paul

Feldman finds that it is not only the ordinary people but also white collar people cheat. It was

able to discern a number of remarkably consistent patterns in the behaviour of those who took

bagels without paying for them. In this story, Levitt demonstrates that cheating, like almost

everything else that involves incentives, can be predicted.

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Basic economic concepts

People respond to incentives:

An incentive is something that induces a person to act. The author says that any sort

of problem can be solved with the help of appropriate incentive scheme. He further adds that

the problem can be solved by any of the three incentives: economic, social or moral. People

substitute or replace one incentive for the other. In the case of day care centre, moral

incentive was replaced by economic incentive and in the case of cheating by school teachers,

incentives for students was replaced by economic and social incentive for teachers.

Consumer behaviourThe behaviour of the consumer changes from individual to individual with

the change in incentive. A particular incentive may be positive for a person but

negative for another person. In the case of Paul Feldman, bagel entrepreneur

even a bagel is worth cheating for.

Cost and benefitIn the case of bagel business people consider social cost and benefit

before cheating. The fewer the number of employees, the greater is the chances

of getting caught and vice-versa. The increase in the number of employees

reduces the social cost and people tend to cheat.

Government regulationThe imposing of any regulation has to be properly analysed. The reactions

to the regulation may be contrary to the goal or objective of the regulation. Inthat case, the whole purpose of imposition is defeated. The author explains this

with the help of high stakes testing.

Macro-economic implicationAny micro-economic event has a macro-economic implication. The events

like cheating by teachers, sumo wrestlers and employees of bagel business has a

long term and macro impact of students suffering in the next grade, rigging

reducing the pride of the sport and change in perception about employees

respectively.

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How is the Ku Klux Klan like a Group of

Real-Estate Agents?

In this chapter, the author explains that how a group of 6 people named KuKlux (meaning a circle of similar minded friends) Klan arouse as a multi-state terrorist

organization to frighten and kill emancipated slaves. They prevented colored people from

bearing arms, prevented their right of free ballot, and suppressed schools in which colored

children studied. They were extinguished in a decade but their objective was carried forward

by Jim Crow laws. They again came into picture after the D.W. Griffiths movie The Birthof a Nation was released in 1915. By 1920 their members multiplied to 8 million in number.

They became low during World War II but again came back more strongly targeting even

Catholics, Jews, communists, unionists, immigrants, agitators, and other disrupters of the

status quo. It emerged as a secret society inducing fear in the minds of the people. The central

theme is on how individuals, organizations, often utilise their access to data and information

at the cost of others. Organisations have achieved great success because of hoarding or

imbalances of flow of information.

Contrary to conventional wisdom, the number of anti-black lynchings in America

declined steadily and precipitously during the first half of the 20th

century. Lynching wasan extremely uncommon cause of death among blacks by the 1960s, which most people

would believe to be a period of intense lynchings given the decades racial strife. National

KKK membership has vacillated, and is unconnected to the frequency

of lynchings.Lynchings probably decreased because the Southern black population became

more submissive with time: Less misbehaviour triggered less frequent responses, and one

lynching had a more pronounced effect on the black population as time passed. In the 1940s

and 50s, writer and civil rights activist Stetson Kennedy infiltrated the Ku Klux Klan posing

as a racist. Kennedy found the Klan full of uneducated, poor white men who needed a social

outlet where they could vent their frustrations about life and society, and which they could

use as an excuse to stay out at night away from their families.

The Klan was steeped in all sorts of ridiculous and complicated traditions and secrets.

The members took great pride in this, as it set them apart from non-Klan members and

made them feel special and important. The KKK leadership generated huge revenues from

members through initiation fees, annual dues, and sales of mandatory Klan robes, legitimate

life insurance policies, Klan rallies, and through extortive taxes for protection money

Kennedy failed to bring down the KKK through legal means, so he tried another route: He

decided to expose and trivialize all of the Klans secret passwords and names by turning them

over to the producers of the Superman radio show.

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The producers cast the Klansmen as Supermans enemies in a series of episodes, and

real Klan jargon was used. Kennedy, who was still undercover in the Klan, noted with

satisfaction that all of the KKK members were in an uproar at the meeting that followed the

first such Superman episode because of the exposure of their secret words. They were upset

seeing little kids who listened to the show because they e-enact anti-Klan battles with their

friends while using actual Klan jargon. The Klansmen decided to change all of their words,

but Kennedy also fed these to the producers, who again broadcast them on the show. KKK

membership suddenly declined as a result.

The Klan was powerful because it horded information that others could not access. In

principle, this is exactly the same type of power held by specialists like lawyers or real estate

agents. In the mid-1990s, term life insurance rates dropped considerably. This was

because the advent of the Internet allowed quotes to be easily compared, whereas previously,

when only paper documents were available, doing so had been very laborious. Information is

power. Once a new car is purchased, it immediately loses a significant fraction of its value,

and this cannot be recovered. This is largely because, if a new car is put up for resale within

a year of its initial purchase, potential buyers will assume that something is wrong with it.

After a year elapses, the stigma of being a potential lemon might disappear, but the cars

value will stay low thanks to age.

The Internet also allows people to make better buying decisions since purchases can be

done without salesman pressure and in the comfort of ones home. Sellers use information

asymmetry to try and get higher prices for their wares: The sellers know more about the truecondition and worth of the product than the potential buyers do, so unfairly high prices can

go unnoticed. All of the big business scandals of the early 2000 have resulted essentially from

businessmen trying to conceal information from outsiders. In the T.V. show The Weakest

Link team members must vote off other players at certain intervals. Statistical analysis of the

voting patterns shows that Americans will inhibit their racism towards blacks and women

(probably because much attention is focused on the historical problems of these groups) when

public eyes are watching, but have few qualms about being bigoted towards Hispanics and

the elderly. Analyses of dating websites and pre-election poll data also show that Americans

will typically claim to be but behave differently in real life.

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Why do drug dealers still live with their

moms?

Author has started with the the first trick of asking question is to determine if the

question is good one. Just because a question has never been asked doesnt make it good, but

if question is asked about something that people really care about and find an answer thatmay surprise them- that is, if one can turn the conventional wisdom- then one may have some

luck.

John Kenneth Galbrith, a hyper literate economic sage has coined the phrase

Conventional wisdom. According to him, it must be simple, convenient, comfortable, and

comforting- though not necessarily true. It doesnt mean that the conventional wisdom is

often not correct, though author has given examples where conventional wisdom may be false

like Homeless American and there death. However, this conventional wisdom is architected

by experts and journalists. This is shown in the example of advertisement of Listerine, a

powerful nineteenth century surgical antiseptic, as a solution for chronic halitosis-an obscure

medical term for bad breadth. Due to such kind of advertisement, Listerine didnt make

mouthwash as much as it made halitosis. Another example for the same is the hype created

Womens right advocates. They have hyped incidence of sexual assault on American women,

claiming that 1 in 3 American women will in their lifetime be a victim of rape or attempted

rape though the actual figure is 1 in 8 and advocates know that it would take a callous person

to publicly dispute their claims. Thus, a little creative lying can grab attention, indignation,

and perhaps most important- the money and political capital. This shows how an experts

incentive shift180 degree, depending on the situation.

Sudhir Venkatesh, a graduate student of sociology from the University of Chicago,

studied and practically lived ghettos criminal life to find out how black disciple operates. He

somehow came to look at a ledger which included their complete financial transection of past

4 years and shared with the author. It revealed that the operation of Black deciple was similar

to any business enterprise like McDonalds. It had a leader, 3officer and 50 foot soldiers. The

hourly wages of a leader, officer and foot soldiers were $66, $7 and $3.3 per hour

respectively. Thus it worked like an business in a capitalist society in which top cats took

away major part of the earnings while others did not make enough money to support their

livings. This was the reason why do drug dealers still live with their moms?

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Again a question arises why anyone on the earth wants to go for such a dangerous job

of crack dealer though it involves low wages. The reason for this is the incentive involved is a

person reaches to the top level in such a competitive field. Thus, criminals like everybody

respond to incentives. Due to this extreme competition, criminal responded to incentives and

J.T move to the board of director.

As the crack business was booming, homicides, infant mortality rate and other violence

increased at alarming rate which made the experts to predict a Bloodbath, but the

conventional wisdom of expert was made false and bloodbath didnt materialized because of

the opposite ripple effect created by Oscar Danilo Blandon.

Review: It talks about the following:

A) Capitalistic economy: In Black deciples, top management contributes only 2.2% of

full-fleged gang membership but takes away almost more than half of the income

generated which is same as what occur in capitalist market in which 80% income is

generated by top level management or richer people.

B) People responds to incentives: Though the crack dealing is much riskier and lowincome job. People are attracted toward the incentive they get when they get in to the

top level management. Thus criminals also respond to incentives.

C) Law of labor: It says that when there are a lot of people willing and able to do job,

that job doesnt pays well. This is because the supply of labor is much more than its

demand and thus results in the lower wages.

D) Conflicting interest of employers and employees (labor): This chapter showed that

the foot soldiers were keen to invoke war with their rivals as it served their purpose of

higher incentives for higher risk involved and the employers (owner) did not want war

as he had to pay more to his foot soldier thus reducing his incentive.

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Where have all the criminals gone?

In this chapter Levitt talks about the sudden decrease in the number of criminals in USA

during 1990s, after the continuous high number of criminals in the society 15 years before

that. Due to sudden decrease in the no. of criminals various reasons were sought.

He further mentions that only three reasons somehow relate to the crime-drop explanation

and the major factor is not even included in the list.

He further discusses the possible crime-drop explanations which are as follows:

1. STRONG ECONOMY- Framing it as one of the least controversial reasons, he saysthat as economy becomes strong, it offers more job which in turn leads to lesser no. of

crimes. But studies show that 1% decline in unemployment results in 1% decrease in

criminals whereas research shows that during 1990s unemployment fell by 2%

whereas non-violent crime fell by 40%.this proves that there is no strong connection

between the two

2. Increased reliance on prisons: During 1960s justice system was very linient which

led to increase in number of criminals. But by 2000 more than 4 times of criminals

were in jail compared to 1972.Harsh prison terms has shown to be both deterrent and

prophylactic. And it accounted for 1/3rd of the total drop in crime.

3. Capital punishment- this didnt serve the purpose as it deemed to be. Even though

the capital punishments were announced but there used to be hugh delay in executing

the same. Also capital punishments cant be a deterrent for non- violent crimes. So it

accounted for only 1/25th of the total homicides in 1990s.

4. Increased number of police: The comparison between the cities where elections

were to be held(more police force) with the one where there were no elections(no

increase in police force) shows that increase in number of police substantially reduces

the number of criminals.

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5. Innovative policing strategies In this author talks about innovative policing

strategies that New York police commissioner applied which led to decrease in

homicides from 30.7/100000 (1990) to 8.4/100000(2000).But studies shows that

before implementation of these strategies violent and non-violent crime already fell

by 20%.

6. Tougher gun laws- It was expected that due to the introduction of Brady Act the

number of homicides must have fell. But the fact that a healthy black market of the

same exists was overlooked. And studies show that 2/3 rd of the total homicides

involved gun.

7. Bursting of the crack bubble- Crack cocaine is a very potent and addictive drug

whose market was created overnight. This led to the gun battle over valuable drug

selling corners. But as crack became cheaper, its profitability decreased and youngdealers decided to put high risk over it.

8. Ageing population- This theory takes into consideration that teenager population is

not getting bigger and an age old person is 1/50 th time less likely to be arrested than a

teenager.

The author then compares the effects of ban on abortion in Romania and USA.In Romania

the ban on abortion was made to boost its population. The children born during this periodgrew for less success in labor market and proved much more likely to become criminals. This

finally resulted in the killing of Romanian dictator and his wife who were given a crude trial

and were executed.

But U.S has the different story. During 1828 to 1960s there was ban on abortion in USA. But

taking into consideration that childhood poverty and single parenthood may lead to criminal

future of the child, finally in 1973,

Supreme courts ruling inRoe v. Wade legalized the abortion.

The author further discuses about the impact of the same on crime.The comparison between

the states where legalization was done earlier than the rest, it is found that violent crimes and

murder rates fell by 13% and 23% more respectively in early-legalizing states.

Now the question of ethics arises whether abortion itself is a crime? Crime drop has been

termed as unintended benefit of abortion .Question here arises what are we to make the

tradeoff more abortion and less crime.

The issue is further analyzed by assuming 1 new born equal to 100 fetus which suggests

number of lose of lives through abortion is same as homicides. This trade off seems to be

terrible insufficient. Summing it up it can be said that when a woman is given a choice he

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usually makes a right decision. The real question is what should the parents do once the child

is born.

What makes a perfect Parent?

This chapter examine the influence of demographic, cultural and other variables that have an

impact on the performance of school children on standardized test.

The chapter begins by reviewing how many parents get educated on raising their children and

how parenting experts swing from one extreme position to another in an attempt to get the

attention of risk-adverse parents.

Rational parent are more careful about the life of the child because they eagerly waited for

them .

As put by Peter Sandman that risk that you control are much less source of outrage than

risk that are out of your control.

Parenting expert tries to engage in emotion to get their attention. Parents do incentive trade

off by taking their opinion and feeling proud in following it.

The author explores other aspects of parenting and what constitutes parenting techniques that

produce positive results

Factor affecting childs outcomes are

Genes,

Family environment,

Socioeconomic status,

Schooling,

Discrimination,

Luck

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Illness

The reasons for Bad parenting is when the parents do not welcome a child. And it happens

due to low socioeconomic status, bad family environment, and may be the child is for

adoption where mommies dont take much care at pregnancy.

As suggested by statistical data collected on race, family structure, socioeconomic, status,

level of parent education and so on. The department after analysing huge data by statistical

tool categorized various aspects, which matters and does not matter on grooming of a child.

So based on authors analysis a successful grooming of a child depends on who their

parents are and not on how parenting is done.

As rightly said a successful child appear to be more made than nurtured, more mused

than moulded.

Perfect Parenting, Part 2

Introduction

Winner, Loser, Temptress, Chastity, Amcher. Do you infer something from the

above words? These are the names parents chose to name their babies. Baby names industry

is one of the booming industries. Parents aspirations and wants about their children are being

resembled in their names .This has been a going trend these days.

Does name of a person affect his or her life style and destiny .Do a child named

WINNER always achieve great laurels in life. On the other hand a child named LOSER

always lose in his life. How does baby names hold a relation with the pulse of the economy

on a whole. This was extensively explained by the author with the help of numerous

examples and research facts. His research went to the extent that he was able to generalize

even the brand of cigarettes each particular person smokes as a part of his habits.

His statements and research facts are perfectly substantiated by the

California names data records available . Specifically, they focus upon the economic

implications of childrens names, especially the overtly ethnic African-American names that

have become common over the last several decades. . In addition to the general trend of

increasingly unique names for white children, Levitt describes a pattern by which highly

educated parents popularize obscure names, gradually compelling the names to achieve

broader popularity. He proposes a repetition of cycle of names, parents use for their babies .

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Review.

Molly, Amy, Claire, Emily and Katie. Can you find a relation between the above

names? If the answer is No, be informed that they are the five most often used White babyGirl names. Imani, Ebony, Shanice, Aaliyah and Precious are the most often used names for

baby girl in blacks.

Now, how can you relate these baby names to the economy? The Author explains it this

way. White parents always tend to set a trend. Their economic status permits and supports

them to do so. Black parents try to imitate their counterparts in Whites, feeling that their

children will also prosper like the White children. This may or may not be true. But the pulse

of the world reveals that whites are more successful than blacks. As he puts in the book that

out of two resumes named DE Shawn Williams and Jake Williams , Jake Williams would get

an interview call, back. He attributes this to the school of thought these names seem morecultured, successful educated etc. A person named WINNER may feel great about his

position, work less and hence results in failures. On the contrary a person named LOSER

may work really hard to display his proficiency and come out of inferiority. The name can

hence may or may not decide the success of a person.

But the Author tries to convey message that baby names are linked to the economic

class to which people belong and the stage to which they aspire to rise. It also depicts the

education level of the parents .Katherine, Emma, Alexandra, Rachel are the most common

white girl names used among high-educated parents. Kayla, Amber, Heather, Brittany and

Brianna are the other end of the education level.

Even the spelling of the names has a role to play in the mindset and social position of

the family.

Hence parents try to signal something with the name, whether its a Winner ,Loser,

Madison, Ambur ,Shithead or Sander. The parents will always feel that they have given the

best to their child.

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Frekonomics Final Review