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Littler Books cover of Freakonomics: A Rogue Economist Explores the Hidden Side of Everything Summary

Freakonomics: A Rogue Economist Explores the Hidden Side of Everything Book Summary, Notes, and Quotes

Steven D. Levitt and Stephen J. Dubner

3.9 minutes to read
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What it's about in a one sentence summary:

A thought-provoking and engaging exploration of the hidden incentives and motivations behind human behavior.

Bullet Point Summary, Notes, and Quotes

  1. Incentives are used by various people to affect behavior, and they can be economic, social, or moral. Incentives can affect one's pride, conscience, or wallet.
    1. The most successful incentives combine all three types.
  2. In the field of crime, the risk of going to prison, moral values, and social pressure are all incentives that discourage people from committing crimes.
  3. Incentivizing behavior can be complex and adding incentives may not always have the desired effect.
  4. In a study on reducing late pick-ups from daycare centers, a small fine of $3 for late pick-ups actually resulted in the number of late pick-ups doubling.
    1. The issue was that the fine replaced an existing moral disincentive -- the guilt parents felt when arriving late.
    2. Once the fine was introduced, parents were able to buy off their guilt, resulting in more late pick-ups.
    3. After the fines were removed, there was no decrease in the number of late pick-ups -- the damage could not be undone.
  5. Consider existing incentives when introducing new ones and the potential unintended consequences (e.g., new incentives displacing current incentives).
  6. Incentives are context dependent. Different people react differently to the same incentives, and even the same person may respond differently to the same incentives on different occasions.
  7. Teachers are incentivized to cheat when standardized test scores determine their raises and promotions.
  8. Sumo wrestlers with winning records are incentivized to lose because they often receive bribes from teams with an even record. Since both teams will still end up with winning records in the tournament, the winning wrestler can afford to lose. This is why wrestlers with a 7-7 record disproportionately defeat opponents with an 8-6 record.
  9. People enter the drug business because of its potential rewards. The rationale is similar to people who franchise a McDonald's restaurant. However, the majority of the money goes to only a handful of people at the top in both scenarios.
  10. An experiment with voluntary bagel payments in snack rooms showed that personal mood affected their decision to pay. Factors like weather, stressful holidays, office morale, and global events (after the 9/11 attacks, more paid because of increased empathy) affected people's moods, and thus influenced payment rates.
  11. Experts have specialized knowledge that laypeople rely on to navigate unfamiliar territory, but an information asymmetry exists that can be exploited for experts' gain.
  12. In real estate, agents' incentive to make a new sale quickly outweighs their commission's part that's aligned with the customer's interests.
    1. Research shows that estate agents leave their own houses on the market longer and get a higher price than when commissioned by clients.
    2. This means that agents may encourage clients to take the first decent offer to maximize the agents' own benefits.
  13. Experts can take advantage of people's fears and lack of knowledge to manipulate them into making decisions that benefit the experts. This can happen in various fields such as car sales, real estate, and stockbroking.
  14. Social fears, such as fear of looking uninformed, cheap, or dishonorable, can be exploited by experts in face-to-face situations.
  15. Try to have strategies in place to buy time to make informed decisions, so you can get a second opinion or research the topic beforehand to reduce the information asymmetry.
  16. The emergence of price comparison websites in the 1990s led to a significant drop in life insurance prices as customers were able to compare prices offered by different companies.
  17. The internet reduced information asymmetry and provided consumers with better access to information before dealing with experts. As a result, consumers can make more informed decisions and reduce the unfair advantage of experts.
  18. Information asymmetry can result in an information gap (lack of information), which has a powerful effect.
  19. A new car can lose a significant amount of its value in just 24 hours due to the assumption that the seller knows something the buyer does not, so the buyer assumes the worst.
  20. Omitting a photo on an online dating site leads to the worst results.
  21. Consider not only the information you provide, but also what the other party expects and the conclusions they may jump to if information is omitted.
  22. We are not as rational as we think when it comes to assessing risks. Our assessments of risks are influenced by how easily we can imagine them and how in control we feel.
  23. We tend to over-assess the risk of rare events such as plane crashes or terrorist attacks because they are frequently reported in the media.
  24. Many feel safer about a swimming pool than a house with a gun, even though the risk of a child being killed in a swimming pool accident is much greater. This is because the imagery of a gun death is stronger and more visceral.
  25. We tend to feel safer when we feel in control, which is why people fear flying more than driving even though the risks of death are similar.
  26. We tend to assume causality when in fact there may only be correlation. Just because two things happen simultaneously, one is not necessarily causing the other.
  27. Washington DC has three times more police officers than Denver but eight times the number of homicides. Obviously, the additional number of officers is not causing the homicides, but only correlated to the number of homicides.
  28. We tend to assume that money is the cause of political victories, but data shows that the amount of money spent has little effect on election results.
    1. A losing candidate who doubles his campaign spendings can only expect a 1% increase in their vote. A winning candidate who halves his campaign spendings can only expect a 1% loss of votes.
    2. Campaign contributors tend to support people who are already winning.
    3. Money is correlated with campaign success, but not the cause.
  29. When determining causality, we overlook remote causes and favor immediate and obvious causes.
  30. When crime rates dropped in the early 1990s in US, experts rushed to explain the drop with factors like improving economy, tougher gun control, and innovative policing, but later analysis showed that the biggest factor was actually abortions (Roe v. Wade legalized abortions in US in 1973), which reduced the cohort of likely criminals.
  31. Studies suggest that at least half of a parent's influence on a child is genetic.
  32. Studies suggest that parenting methods involving specific actions have little to no effect, while parental qualities such as education level and age at the time of having children have a demonstrable influence.
    1. I.e., who the parents are (qualities) is more important than what the parents do (actions).
  33. A child's name can impact their future. Studies show that names can create prejudice and bias, with stereotypically black names, for example, being less likely to lead to job interviews even with identical résumés as their white counterparts.
  34. Statistical analyses of material measures such as child development and economic success do not fully capture how people behave.
    1. Roland Fryer, who grew up in an impoverished black community with an abusive father went on to become a brilliant Harvard economist.
    2. Ted Kaczynski, who grew up in an upper-class white community with loving parents became the infamous Unabomber.

Freakonomics: Resources