You want to think like an economist, but you’re intimidated by the thought of breaking down intricate algorithms and obscure theories? Fortunately, you don’t need to become an academic to adopt an economist’s perspective. The easiest way to understand it is to realize that economics is fundamentally about how people react to incentives.
And the people who created Freakonomics are the ones who make that more understandable, entertaining, and approachable. They have amassed a fortune by demonstrating how seemingly unconnected phenomena are frequently connected by strong, frequently concealed incentives. Let’s move on from the equations and into the real-world application. People react to incentives, which is the central tenet of freakonomics. The way they illustrate it is innovative, but this itself isn’t.
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Although money is a significant factor, it’s not the only one. Understanding incentives requires analyzing human behavior in unexpected ways. Incentives can take many different forms.
Examining Various Incentive Types. Contemplate beyond the obvious. Financial incentives are obvious: if you give someone more money, they will probably do more. But what about the more complex ones?
moral rewards. These have to do with acting “right.”. You may act differently if you believe that others are observing or passing judgment. Think about the traditional office “honor system” for coffee; even in the absence of a cashier, many people are kept honest by the moral incentive to avoid being perceived as thieves.
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When a late fee is implemented, freakonomics may examine why some parents are less likely to pick up their children late. This suggests that the moral incentive to avoid being late (and being perceived as a bad parent) may occasionally outweigh the financial disincentive. social rewards. We are social beings. We want to blend in and be liked & respected. Much of our decision-making is motivated by this.
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Consider trends, styles, or even picking a specific college because your friends are enrolled there. The incentive is the avoidance of social isolation or social acceptance rather than a clear reward. Freakonomics frequently examines how social norms and the need to fit in or stand out affect everything from voting behavior to child naming. Perverse motivations.
It gets really interesting at this point. An incentive that has an unexpected, frequently detrimental effect that goes against the designers’ intentions is known as a perverse incentive. This is a common occurrence. The Cobra Impact.
An iconic example. Concerned about the abundance of poisonous cobras in Delhi during British rule, the Indian government offered a reward for dead cobras. This was effective at first, killing a lot of cobras. However, soon after, people began breeding cobras especially to get the bounty.
The bounty was eliminated by the government after they became aware of this. The population of cobras in the wild increased after the breeders released their now-worthless cobras. The incentive that was intended to address an issue actually made it worse. Fees for late childcare. This actual example became well-known thanks to freakonomics. In an effort to cut down on tardiness, a daycare decided to impose a small fine on parents who picked up their kids late.
What transpired was an increase in tardiness. Guilt & social pressure (moral/social incentives) were powerful deterrents prior to the fine. But the fine reframed the conversation.
The late fee was now viewed by parents as a cost of convenience rather than a penalty. They were essentially paying for the privilege of being late, and some of them decided to use that privilege more frequently. How to Put This Thinking to Use. When confronted with any scenario involving human behavior, consider the following.
What are the clear motivations at work? What incentives are hidden or less evident? Are any of these incentives causing unforeseen consequences? What bizarre consequences might occur if I were to implement a new reward? A healthy skepticism toward widely held beliefs is a defining characteristic of thinking like an economist à la Freakonomics.
Anything that “everyone knows” is not necessarily true. In actuality, these are frequently the most conducive locations for true discovery. Going Past the Surface.
Conventional wisdom offers simple solutions, but these solutions are frequently insufficient, deceptive, or simply incorrect. An economist-in-training must examine the data rather than merely believe stories. The Drug Kingpins “Myth”. Many people think that while their street-level dealers struggle to make ends meet, drug kingpins are wealthy & lead opulent lifestyles. A very different picture emerged when Freakonomics examined a drug gang’s real financial ledgers.
Even though the top echelons received the great majority of the money, many of them were not as wealthy as people thought. In addition to earning less than the minimum wage, street vendors had a higher risk of dying than most other occupations. They were motivated by the prospect of becoming the best one day rather than by money.
The Effects of Roe v. On crime, Wade. This one seriously questioned accepted wisdom.
The reasons behind the sharp decline in crime during the 1990s were the subject of decades of discussion among experts. Many cited improved law enforcement, economic growth, or tougher gun regulations. Freakonomics proposed a contentious theory that the Roe v. Wade decision legalized abortion.
Wade in 1973 had a big impact. Unwanted children born into low-income families were statistically more likely to commit crimes as adults, according to the argument. Many of these births were stopped by Roe v. Inadvertently, Wade reduced the number of potential offenders who reached adolescence in the 1990s. This was about applying economic reasoning and data analysis to a complicated social phenomenon, regardless of where the data leads, not about endorsing or opposing abortion. How to Use This Thought Process.
Pause when you hear something that is generally acknowledged. “What evidence might contradict this? What evidence supports this?”. Explanations that link complicated results to straightforward, sentimental causes should be avoided. If the data points to a connection between seemingly unrelated concepts, don’t be scared to make it.
Data is a passion of economists. They use it as their main tool to test theories, find hidden patterns, and question presumptions. Freakonomics does more than just speculate; even when it’s uncomfortable, it examines the data to determine what it actually says. Correlation vs.
The Key Difference is Causation. For anyone attempting to think like an economist, this is possibly the most crucial lesson from Freakonomics. The mere fact that two events occur simultaneously or appear to be connected does not prove that one causes the other.
Good Parents and Good Students: The “Link”. Children who have involved parents typically perform better academically, according to numerous studies. According to popular belief, “good grades are caused by involved parents.”.
A different perspective is brought up by freakonomics: what if the same underlying causes of parental involvement (e.g. A g. Higher levels of education, stable finances, & a strong emphasis on education) also directly contribute to a child’s success, independent of the act of parental involvement itself? They note that while factors like parental education, genes, & home environment are far more predictive of test scores, many common parental efforts (reading to children, frequent museum visits) show little causal effect. It’s challenging because factors that lead to high grades are frequently correlated with the traits of involved parents.
Teachers & Sumos: Cheating Exposed. Another outstanding example of identifying hidden patterns in data. Freakonomics looked at sumo wrestlers’ performance records & public school teachers’ test results. How?
By searching for anomalies. Teachers whose classes displayed odd “streaks” of right answers or suspicious erasures that converted an incorrect answer to a correct one were among the suspicious patterns they observed in test results. Similar to this, they discovered that in sumo, lower-ranked wrestlers frequently prevailed over higher-ranked wrestlers after the latter had already established their tournament winning record.
This was an implicit understanding—an incentive system where the higher-ranked wrestler might “gift” a victory in exchange for a future favor—rather than overt bribery. Data, not anecdotal evidence, suggested likely cheating in both situations. How to Use This Concept.
“Is there evidence for a direct causal link, or is this just correlation?” is a question to pose when faced with a “this causes that” statement.
Seek out methods to isolate variables or natural experiments. Be receptive to what the data reveals, even if it goes against your intuition or conventional wisdom. Don’t let your interpretation be skewed by your preconceptions. Economists tackle issues using a particular set of instruments & a perspective that emphasizes comprehending costs, benefits, and long-term effects rather than just quick fixes.
Costs and Benefits: The Constant Tally. Every choice, action, and policy has advantages and disadvantages. These are measured by an economist, who frequently takes “opportunity” or hidden costs into account. The price of a vacant seat.
Think of airlines. An empty seat on a flight is a pure loss since it is a perishable item that cannot be sold at a later time. Filling that seat with a last-minute passenger has very little marginal cost (a little extra fuel, maybe a cheap snack).
However, even a lower price could result in a substantial marginal benefit. This knowledge informs overbooking and dynamic pricing tactics. Airlines examine the cost of each individual seat in addition to the cost of getting the aircraft into the air. A cost of opportunity. This is an essential idea. The value of the next best option that was passed up is known as the opportunity cost of any decision.
If you spend an hour watching TV, the opportunity cost isn’t just the electricity; it’s the hour you could have spent working, exercising, or reading. When a city decides to build a new stadium, the money spent on that stadium is money that could have been spent on schools, hospitals, or roads. An economist is always thinking about what was sacrificed.
Long-Term vs. immediate effects. Many policies and decisions yield immediate, visible benefits but have subtle, negative long-term consequences. Conversely, some good long-term solutions are painful in the short-term.
The Unintended Consequences of Car Safety. Early seatbelt laws & other safety innovations in cars led to a surprising observation: drivers, feeling safer, sometimes drove more aggressively. This is known as “moral hazard. ” While fewer drivers died inside their cars, the increased aggression led to more accidents overall, sometimes harming pedestrians and cyclists. The immediate benefit (safer drivers in crashes) had a nuanced long-term effect on overall road safety.
How to Apply This Thinking. Before making a decision, list out the explicit and implicit costs and benefits. Remember the opportunity costs. Always think about what might occur in the future rather than just what is immediately apparent. Consider the concept of “moral hazard”: does making something safer or providing insurance against a risk unintentionally promote riskier behavior? The embrace of ignorance is one of the most liberating features of an economic mindset, especially the Freakonomics approach.
Admitting that you don’t have all the answers & being open to facing difficult realities are often the first steps toward true understanding. Declaring “I Don’t Know” without fear. We are all too frequently under pressure to have a view on everything. Economists are educated to be at ease with ambiguity.
Saying “we need more information” or “the data is inconclusive” is preferable to providing a definitive but unsupported response. The Fabled “Magic Bullet”. The “magic bullet” that will solve poverty, education, or climate change is what society is always looking for.
Freakonomics frequently shows that these kinds of bullets are uncommon. Solutions to complex problems frequently entail trade-offs and unforeseen consequences. In order to solve problems effectively, it is important to acknowledge this complexity rather than ignore it. Fighting Your Own Prejudices.
Each of us has prejudices. Information that supports our preexisting beliefs tends to be preferred (confirmation bias). In order to think like an economist, you must actively work to overcome these prejudices, look for evidence that contradicts your beliefs, and be willing to change your mind when the evidence warrants it.
The issue of the “Expert”. Although experts have their own biases and incentives, they can be very helpful. For obvious reasons, a real estate agent may advise you that now is always a good time to buy.
Treatments that a doctor is familiar with or that pay more may be preferred. Freakonomics promotes examining the data & the “expert’s” incentives rather than relying solely on authority. “What’s in it for them?” is a question you should ask yourself whenever an expert gives you advice. How to Use This Thought Process. When you don’t know something, feel free to admit it.
It’s an opportunity to learn rather than a weakness. Actively question your own presumptions and look for data that could refute them. Anyone offering a single, straightforward solution to a complicated issue should be viewed with suspicion. The motivations of the “experts” you are listening to should always be taken into account.
By adopting these principles – focusing on incentives, questioning conventional wisdom, letting data guide you, using an economist’s toolkit, and embracing ignorance – you’re well on your way to thinking like an economist, even without a fancy degree. It’s about skepticism, curiosity, and an unwavering quest to comprehend how the world functions in reality rather than just how we believe it ought to.
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