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Freakonomics
A Rogue Economist Explores the Hidden Side of Everything
Freakonomics (2005) applies rational economic analysis to everyday situations, from online dating to buying a house. The book reveals why the way we make decisions is often irrational, why conventional wisdom is frequently wrong, and how and why we are incentivized to do what we do.
- Anyone interested in human decision-making.
- Managers with an interest in the impact of incentives and risk analysis
- Economists looking for a more creative approach to using the tools of economics
Steven D. Levitt teaches economics at the University of Chicago. His unorthodox approach of using the tools of economics to reveal hidden aspects of everyday decisions has triggered debate in the media and academic circles.
Stephen J. Dubner is a former writer and editor at the New York Times Magazine. He is also the author of Turbulent Souls, Confessions of a Hero-Worshiper, and the children's book The Boy with Two Belly Buttons.
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Freakonomics
A Rogue Economist Explores the Hidden Side of Everything
- Read in 16 minutes
- Audio & text available
- Contains 10 key ideas
Synopsis
Freakonomics (2005) applies rational economic analysis to everyday situations, from online dating to buying a house. The book reveals why the way we make decisions is often irrational, why conventional wisdom is frequently wrong, and how and why we are incentivized to do what we do.
Key idea 1 of 10
Introducing incentives can often have unintended consequences on people’s behavior.
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. To accomplish this, they introduced the economic disincentive of a small $3 fine.
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.
Introducing incentives can often have unintended consequences on people’s behavior.
Key ideas in this title
- Introducing incentives can often have unintended consequences on people’s behavior.
- Incentives are context dependent: what works when it’s sunny might not when it’s raining.
- Experts can use their informational advantage to exploit laypeople for economic benefit.
- Experts can use fear and anxiety to cheat laypeople.
- The Internet has greatly helped reduce the informational advantage of experts.
- When sellers leave out information, customers often penalize them by assuming the worst.
- People worry disproportionately about risks that are particularly prominent or over which they have little control.
- We often incorrectly assume that just because two things happen simultaneously, one is causing the other.
- When attributing causality, we tend to overlook remote causes in favor of more immediate ones.
- Final summary
