Freakonomics by steven d levitt and stephen j dubner pdf

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freakonomics by steven d levitt and stephen j dubner pdf

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Freakonomics

Has Freakonomics by Steven D. Levitt and Stephen J. Dubner been sitting on your reading list? Pick up the key ideas in the book with this quick summary. At this very moment, there are probably countless people who wish to affect your behavior: politicians, police, your doctor, your boss, your parents or your spouse, to name just a few.

Although the tactics used may vary from threats and bribes to charm and deceit, all attempts have something in common: they rely on incentives. An incentive is simply a means of urging people to do more of a good thing or less of a bad thing. Incentives fall into three general categories: economic, social and moral.

Most successful incentives — the ones that attain the desired change in behavior — combine all three types. One area where incentives are crucial is in the field of crime. The risk of going to prison and the related loss of employment, house and freedom are all essentially economic in nature, and certainly form a strong incentive against crime. And finally there is a strong social incentive, as people do not want to be seen by others as doing something wrong.

Often, depending on the crime, this can be a stronger incentive than economic penalties. It is this combination of all three types of incentives that encourage most people to refrain from crime. We are all familiar with attempts to incentivize behavior. Whether it is parents offering small treats to their children for doing schoolwork or companies paying bonuses to employees who hit their sales targets, everyone has had incentives dangled in front of them.

However, influencing behavior by adding incentives is often a more complicated affair than it might first seem. Incentives often operate in an environment where small changes can have a dramatic impact, and not always in the way those initiating the changes would hope. In a study of day care centers in Haifa, Israel, economists tried to reduce the number of parents arriving late to pick up their children. But rather than reduce the number of late pick-ups, the change actually doubled them.

How could adding this disincentive have backfired? One problem may have been that the amount was not big enough, signaling to the parents that late pick-ups were not a significant problem. The main issue, however, was that this small economic disincentive replaced an existing moral disincentive: the guilt parents felt when arriving late. Parents could now effectively buy off their guilt for a few dollars, so they were less worried about being late.

Furthermore, once the signal had been sent, the effect could not be undone. The removal of the fines had no remedial effect on the number of late pick-ups. As the example shows, setting incentives can be tricky, especially when other forms of incentive are already present. When introducing incentives, think carefully about whether they might displace existing ones. Have you ever robbed a bank? Probably not, since there are a variety of disincentives e. And yet, some people do rob banks even though they face the same disincentives.

This is fairly self-evident, but more surprisingly, even one and the same person may respond differently to the same incentives on different occasions. Consider the data collected by Paul Feldman, who ran a business providing bagels to office snack rooms. With the bagels, he left an unattended cash-box for customers to pay in, and picked up the cash and leftovers at the end of each day. Each customer had the same incentives to pay — the desire to be and look honest — so the variations in payment rates each day and at the different locations revealed some interesting trends about honesty in changing conditions.

The key contributing factor in how honest his customers were seemed to have been personal mood , which was in turn affected by other factors:. The weather played a big role with higher payment rates on unseasonably warm days and lower rates on unseasonably cold days.

Stressful holidays like Christmas and Thanksgiving dramatically reduced payment rates while more relaxed holidays pushed the rates up. Similarly, office morale played a part, with people in happy offices being more likely to pay. The lesson is that the incentives that work for some people on some days may not work for the same people on other days, depending on shifts in global, local or personal circumstances that affect their moods. Everyone needs the advice of an expert from time to time.

Whether you are having something repaired, making a big purchase or dealing with a legal issue, you rely on someone with specialist knowledge to help you navigate through unfamiliar territory. Experts have access to a wealth of information that the layperson does not, meaning an information asymmetry exists. Although the experts are usually paid a fee or commission for their expertise, they can also use their informational advantage to cheat laypeople for additional gain.

Consider real estate: For most people, selling a house is one of the biggest financial transactions they will make in their lifetime. It can be a complicated business, which is why you rely on your real estate agent who has all the relevant information on property prices and market trends and is presumably also motivated to get the best price possible to raise her commission.

You feel assured knowing you have this level of expertise on your side. While reassuring, this thinking is a little too simplistic. A comparison study reveals that when estate agents sell their own houses they leave them on the market longer and get a higher price than when commissioned by clients. Hence beware; when an estate agent encourages you to take the first decent offer on your house, it is not to maximize your profit but their own.

Experts can use their informational advantage to exploit laypeople for economic benefit. The unknown can be pretty scary. In any transaction in an area you have little knowledge or information about, you will likely be worried and anxious.

Experts frequently leverage this fear for financial gain. This can happen in a number of ways: A car salesman can convince you not to buy a cheaper model by instilling the fear that it is unsafe. A real estate agent can play on your fear of missing out on your dream house to get you to put in a higher bid. Fear undermines our rational decision-making ability, which is why experts use it to scare us into making decisions we may otherwise not have made.

In face-to-face situations, social fears can exacerbate this problem: the expert can exploit our fears of looking stupid, cheap or dishonorable. Imagine the stressful situation of arranging the funeral of a loved one. The funeral director, knowing you know little about his business, can use your anxieties about giving your loved one a proper burial to steer you to a more expensive casket than you would have otherwise chosen. In such cases, try to have strategies in place that will buy you valuable time and space to consider your choices in peace, such as saying you need to get a second opinion.

You can also try to even out the information asymmetry by researching the topic of the transaction in advance. In the s, the price of life insurance fell dramatically. There was no similar trend in other forms of insurance, or any significant shifts in the life insurance business or customer base itself. So, why this sudden drop in prices? The answer lies with the emergence of the Internet, or more specifically of price comparison websites.

These websites enabled customers to compare insurance prices offered by dozens of different companies in mere seconds. Price information that had been extremely time-consuming to gather just a few years earlier was available at the click of a mouse.

As the policies were fairly similar in nature, the more expensive companies had no choice but to lower their prices, driving down the overall price of the policies. This example demonstrates how important the Internet has been in eroding and reducing information asymmetries all over the world.

At its core, it is a highly efficient medium for sharing and redistributing information from those that have it to those who do not. If you are buying a house today, for example, you can go online and find out for yourself what a reasonable offer would be rather than relying on the word of your estate agent.

One of the side effects of a culture of information asymmetry is that even a lack of information — real or perceived — can have a powerful effect. For example, it is commonly understood that once a new car is bought it will instantly lose as much as a quarter of its value.

The reason lies in information asymmetry. The buyer cannot know the true reasons why the seller is selling their new car, so they logically assume that there is something wrong with it.

Even if this is not the case, the buyer assumes that the seller has information they are not revealing, and fills this information gap with his or her own assumption. Effectively, the seller is punished because of the information asymmetry.

A study of online dating sites provides another example of this effect. Results show that the single worst thing a user can do to lower the amount of interest they generate is to omit their photo. When others see they have done this, they assume the worst. The lesson is that in any transaction, it is clearly important to not only focus on the information you provide but also consider the information the other party expects you to provide, and what conclusions they are likely to jump to if you omit it.

When sellers leave out information, customers often penalize them by assuming the worst. One factor that disproportionately influences our assessment is how readily we can imagine the risk in question.

Although they are in fact quite rare, we can easily imagine plane crashes, gun crime or terrorist attacks occurring due to their excessive coverage in the media. This leads us to over-assess the risk of these threats. The thought of a child being shot with a gun is horrifying and creates outrage. Swimming pools do not, so we would probably feel safer about the swimming pool. But actually, the likelihood of a child being killed by gunshot is much smaller than that of being killed in a swimming pool accident.

A second factor in our evaluation of risk is how in control we feel. But the risk of death in either form of transport is in fact about the same. Being aware of our biases in these respects is the first step in resisting them. The second is seeking out solid facts about risks to help counter gut reactions and make more rational evaluations. People worry disproportionately about risks that are particularly prominent or over which they have little control.

Despite having similar populations, the city of Washington DC has three times the number of police officers as Denver and eight times the number of homicides. Would you assume that the additional officers are causing the higher rate of homicide? When we see that an increase in a certain factor, X, corresponds with an increase in another factor, Y, it is tempting to think that the relationship is causal and that the increase in X caused the increase in Y.

This is a human tendency: we assume causality when in fact there may only be correlation. Consider the example of money and politics.

Freakonomics

Freakonomics by Steven D. Also, we made some mistakes. Levitt, Stephen J. Detailed quotes explanations with page numbers for every important quote on the site. Levitt It was published on April 12, , by William Morrow.

Freakonomics Summary and Review

Has Freakonomics by Steven D. Levitt and Stephen J. Dubner been sitting on your reading list? Pick up the key ideas in the book with this quick summary. At this very moment, there are probably countless people who wish to affect your behavior: politicians, police, your doctor, your boss, your parents or your spouse, to name just a few.

Sign up for our newsletters! Imagine for a moment that you are the manager of a day-care center. You have a clearly stated policy that children are supposed to be picked up by 4 p. But very often parents are late. The result: at day's end, you have some anxious children and at least one teacher who must wait around for the parents to arrive.

Freakonomics Summary and Review

Freakonomics addresses current social questions that students will enjoy arguing about both in the classroom and over coffee in the student union:. These may not sound like typical questions an economist asks, but Levitt is not your typical economist. He studies the mysteries of everyday life—from cheating and crime to sports and child rearing—and his conclusions regularly turn conventional wisdom on its head, helping students develop a critical eye to many things that are presented as fact. Prepare to be dazzled. This is bracing fun of the highest order.

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Freakonomics

COMMENT 3

  • Published on April 12, , by William Morrow , the book has been described as melding pop culture with economics. Florian E. - 02.04.2021 at 08:43
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