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What do Schoolteachers and Sumo Wrestlers have in common?  Why do Drug Dealers still live with their moms?  How is the Ku Klux Klan like a group of Real-Estate Agents?  It’s these questions and others that Steven Levitt and Stephen Dubner explore and answer in their ground breaking book Freakonomics.  Stephen J. Dubner is a self proclaimed “rogue economist”; an individual who believes that, “since the science of economics is primarily a set of tools, as opposed to a subject matter, then no subject, no matter how offbeat, need be beyond its reach.” (Freakonomics, page 12)

Armed with his set of analysis tools and aided by the literary skills of Levitt, Dubner challenges popular belief on topics from crime to parenting.  (Pop quiz: What is more deadly – a swimming pool or a handgun?)

While both he and Levitt put up a united front in claiming to have no specific focus to their book, the one common underlying theme to the book in general can be summed up in two words – Question Everything.

The Big Idea

X,Y and Z

“Consider the folktale of the czar who learned that the most disease ridden province in his empire was also the province with the most doctors.  His solution?  He promptly ordered all the doctors shot dead.”

Freakonomics, page 8

One of the great takeaways from Freakonomics is the reminder that we need to question assumptions; those of others and our own.  Take the above statement as an example.  If we look at it from an economist’s perspective, we have two facts –

Fact X: There is a province with a high rate of disease.

Fact Y: That same province has the highest number of doctors in it.

Is it so unreasonable that, without more information, you might assume that the doctors were causing the disease.  Rediculous?  Sure it is, but only based on the fact that we know the doctors were probably sent there to cure the disease. (rather than cause it)  What we intuitively know in this case is the cause (x) and the effect (Y).  What about cases where the cause and effect are not so obvious?  Or more dangerous yet, cases where we think we intuitively know the answer.

The crime rate in New York City dropped after Mayor Giuliani and his Chief of Police implemented new, ingenuous crime fighting tactics.  Simple cause and effect?  Levitt and Dubner would argue otherwise.  Innovative and modern policing strategies come from increased budgets.  With increased budgets, the number of officers on the force could (and did) increase as well, which is more likely to be part of the reason for the reduced crime rate.   As Levitt and Dubner show us, correlation does not always mean causality.  It’s important to look at all the facts and possible reasons for something before jumping to conclusions.  More often than not, the true cause of something wasn’t even considered in the initial conversation.  For those who haven’t read Freakonomics, how shocked would you be to learn that the true reason for the great drop in murder in the US in the mid-90s had less to do with economy or policing strategies than with the legalization of abortion twenty years earlier?

Insight #1

The Butterfly Effect

Our ability to affect the people and situations in the world around us wildly exceeds our comprehension.

In the mid 1990’s, despite warnings that crime would spike dramatically in the United States, it quickly and inexplicably dropped.  And it dropped a lot.  The popular media opinion for the decline varied from source to source, with some of the top explanations including “innovative policing strategies”, “stronger enforced gun-control” and “a strong economy”.  (page 108-9)

Contrary to what the media may have said at the time, Levitt and Dubner build an irrefutable case that in fact it was the 1973 Supreme Court Case, Roe vs Wade that had more of an impact on the drop in crime in the 1990’s than all other supposed factors combined.  How could such a thing be possible?  And, perhaps as importantly, why did no one in the media pick up on it?

The “how” is pretty logical, once it’s explained:

“Decades of study have shown that a child born into an adverse family environment is far more likely than other children to become a criminal.  And the millions of women most likely to have an abortion in the wake of Roe v. Wade – poor, unmarried, and teenage mothers for whom illegal abortions had been too expensive or hard to get – were often models of adversity.”

Freakonomics, page 4

In a very crude nutshell, mothers know if their child is going to be raised in a positive environment or not.  The 1.6 million abortions in 1980 alone consisted of a high percentage of “would-be-at-risk-children” that simply never existed in the mid 90’s, when they would have been entering their criminal years.

As an aside, for those who may be offended by the candid conversation of abortions, Levitt reassures us “Freakonomics simply doesn’t traffic in morality” (page 190).  “Morality, it could be argued, represents the way people would like the world to work – whereas economics represents how it actually does work.” (page 11)

So that may explain “how”, but that brings us to our next question – why is it that not a single media source throughout the 90’s was able to come to the conclusion, or even hazard a guess that abortion could have been a cause for the decrease in crime?  We could hypothesize that no one looked at the situation in the same way as Levitt.  If that is the case, then this acts as a great reminder that a fresh perspective and some distance from the situation can provide amazing insights… even after the “experts” have reached all the logical conclusions.

Let’s consider the very real possibility for a moment though that someone, even just one person over the last 10 + years, did come to the conclusion that the legalization of abortion caused a severe drop in crime 20 years later.  Why might they have chosen not to publish their theories and/or findings?

Insight #2

The Human Condition:  Understanding Incentives

Here’s something to keep in mind, whether you choose to use it in motivating yourself or those around you –

“there are three basic flavors of incentive: economic, social, and moral.”

(Freakonomics, page 17)

In their most basic form, the incentives work like this:

Economic – there may be a financial cost to doing wrong (losing your job, being fined, being sued, etc.)

Social – the risk of being judged poorly by their peers is a powerful deterrent.

Moral – Guilt, personal code and social upbringing have wired us to understand that some things are wrong.

Any anxiety or distaste you may have felt during the abortion discussion tie nicely into understanding incentives.  If you pretend you are a reporter in 1994 who stumbled upon the same findings as Levitt did in regards to the effect of abortion on crime rates, you may have withheld the information for either of the latter two types of incentive.  Perhaps it’s concern for public outrage, or your own personal feelings towards abortion.

While we won’t spend a lot of time on the topic of incentives, it’s worth remembering that the three “basic flavors”, that is economic, social and moral, work in both directions.  While many employers still attempt to motivate their staff through strictly financial gains, it’s important to realize that social (ie. public recognition) and moral (ie. Letting them know how much they’ve benefitted the company) can also be extremely powerful.

Freakonomics is so engaging, so enjoyable and refreshing, it’s been an exhausting and yet rewarding challenge to capture it’s essence in this brief discussion.  In summary I’ll say this – Freakonomics is more than interesting stories, it’s a breath of fresh air into the stereotypically stale world of economics.  Levitt and Dubner show us that any situation can be re-invigorated through fresh eyes, and that it truly pays to challenge the “easy assumption”.  In a sense, what they really teach us what it’s like to be a 5 year old again, albeit a 5 year old with a Harvard PHD.