1. Freakanomics
Steven Levitt & Stephen Dubner
Vishwanath Ramdas

2. explore the hidden side of…everything
• I’m having a hard time seeing the unifying theme of your work * to steven+
– philosopher Robert Nozick interrupted. “How old are you, Steve? Should he even have a
unifying theme?
• Whats the cause and what the reaction?
– A correlation simply means that a relationship exists between two factors—let’s call them X
and Y—but it tells you nothing about the direction of that relationship. It’s possible that X
causes Y; it’s also possible that Y causes X; and it may be that X and Y are both being caused
by some other factor, Z.
– Some e.g.
• Reducing crime rates in USA
• Real estate agents – not working for their clients
• Money buys power in politics?
• As Levitt sees it, economics is a science with excellent tools for gaining answers but a
serious shortage of interesting questions
• Levitt’s abiding interests
– though he says he has never trafficked in them himself—are cheating, corruption, and crime
• Incentives are the cornerstone of modern life
– And understanding them—or, often, ferreting them out—is the key to solving just about any
riddle, from violent crime to sports cheating to online dating.
Vishwanath Ramdas

3. explore the hidden side of…everything
• “Experts”
– from criminologists to real-estate agents—use their informational advantage to
serve their own agenda.
• Knowing what to measure and how to measure it makes a complicated world
much less so.
– If you learn how to look at data in the right way, you can explain riddles that
otherwise might have seemed impossible.
• This book boasts no such unifying theme.
• opted instead for a sort of treasure-hunt approach
– Resulting in Freakonomics
– No subject is beyond the reach of econ. As it is a set of tools
• Economics is all about incentive
– incentive is simply a means of urging people to do more of a good thing and less of
a bad thing.
Vishwanath Ramdas

4. Economics is about incentives
• Some e.gs • Types of incentives [ how about chakra
– Boston tea party due to a 2 cent tax on model?
tea. – Thomas Jefferson – Us Revolution – Muladhara [Bhuhu]
– High stakes testing – 2002 no child left • Identity / Ego / existence / life
behind law – Bush – Prathishtana [Bhuvaha]
• CEO of the Chicago Public Schools, Arne • Base [Sexual] / Embarassment / Anger /
Duncan, follow-up test Fear
– Sumo wrestlers cheating – for the 8 win – Manipura [Suvaha]
mark • Monetary / Economic
– Paul Feldman – The Bagel Man > – Anahata [ Mahaha]
• White collar crime – no good data • Moral / Social / Relationship / Trust
• > 10 % bagels stolen but all money safe – Visuddhi [Janaha]
—a tribute to the nuanced social • Fame / Recognition / Control
calculus of theft.
– Agna [Tapaha]
– “The Ring of Gyges,” narrates Feldman • Intellectual /Logical
• from Plato’s Republic.
• Gyges gets a ring of invisibility and – Sahasrara [Satyam]
becomes evil – referred by Gloucon the • Spiritual? / Selflessness? / Death?
student of Socrates as evidence against
his belief in the inherent goodness of • Squaring of wrong category of
people incentives
• Richard Thaler, in his 1985 “Beer on the • Incentives result in their negative side
Beach” study, effects
– Premium based on service aura – Cheating / Crime / circumvention
Vishwanath Ramdas

5. The theme of
Adam Smith’s
first book,
The Theory of Moral Sentiments,
was the innate honesty of mankind. “How selfish soever man may
be supposed,” Smith wrote, “there are evidently some principles in
his nature, which interest him in the fortune of others, and render
their happiness necessary to him, though he derives nothing from it,
except the pleasure of seeing it.
Vishwanath Ramdas

6. Incentives / Morals
• “shaming” offensive, incentives
– posting pictures of convicted johns (and prostitutes) on websites or on local-
access television works better than monetary incentives
– Hester Prynne’s scarlet letter
• W. C. Fields once said: a thing worth having is a thing worth cheating for.
• Academics know little about - white-collar crime.
– The reason? There are no good data.
– Despite all the attention paid to rogue companies like Enron
• Shame works better in smaller community
– They tend to exert greater social incentives against crime
• Gopu44 :: Small teams therefore work better
Vishwanath Ramdas

7. The Incentive / Power of Information
• The history of the Ku Klux Klan and its busting in the 1960s
– by stetson kennedy ingognito as John S Perkins,
– Atlanta [imperial city of KKK] stone
– By revelaing secret information to radio program and infanticizing their credo
• AYAK? AKAI? Klavaliers,
– Founded Anti-defamation league [ frown power]
• Price of term life insurance and the internet
– Other insurance products are more complex,
– Term life insurance was pure price play and price comparison killed it!
• “Sunlight is said to be the best of disinfectants.”
– Supreme Court Justice Louis D. Brandeis
• Information asymmetry
– Insider Trading [ImClone]
– Exclusive Pricing [enron / Experts]
– Jargon complexity / innuendo
• Hidden meaning in information
– Specific vs ambiguous
• Real estate terms
– Discriminating preferences
Vishwanath Ramdas

8. Power through hoarding information
politicians or real-estate agents or stockbrokers—was derived in
large part from the fact that it hoarded information
As Supreme Court Justice Louis D. Brandeis once wrote,
“Sunlight is said to be the best of
disinfectants.”
sins of information
Vishwanath Ramdas

9. Incentives - Asymmetry
• Incentive Asymmetry
– Broker selling houses sub-optimally
• Loaded – Jargon words
– White lies
– Comparing descriptive words with empty adjectivces
• Test for discrimination in public [ bigotry ]
– UK Game – Weakest link
• Collectively score but at the same time throw out by voting
• Good to throw poor players early and strong later
• Correlate that with demographics
– Blacks and women [ protected groups in society]
– Elders [taste based] & hispanics [ information based] – discriminated
– Internet dating
– Voters lie
• New York City’s 1989 mayoral race between David Dinkins (a black candidate) and
Rudolph Giuliani
Vishwanath Ramdas

10. first trick of asking questions is to determine if your question is a
good one. if you can overturn the conventional wisdom—then you
may have some luck.
John Kenneth Galbraith, the hyper-literate economic sage
“conventional wisdom.”
Not a compliment. “We associate truth with convenience,” he wrote,
“with what most closely accords with self-interest and personal well-
being or promises best to avoid awkward effort or unwelcome
dislocation of life. We also find highly acceptable what contributes
most to self-esteem.” Economic and social behavior, Galbraith
continued, “are complex, and to comprehend their character is
mentally tiring. Therefore we adhere, as though to a raft, to those
ideas which represent our understanding.”
Vishwanath Ramdas

11. Beating conventional Wisdom
• Gopu44:: “Create an effect”
– Create an effect and then link the object to it positive or negative
• Mitch Snyder – homeless people
– made up numbers to create an effect 3 Mn Homeless, 45 die every second!
• Listerine :: Chronic Halitosis [bad breath]
– Surgical antiseptic, floor cleaner and finally used oral area
– Listerine’s new ads :: young women and men, eager for marriage but turned off by
their mate’s rotten breath. “Can I be happy with him in spite of that?”
• Until that time, bad breath was not conventionally considered such a catastrophe.
• Advertising scholar James B. Twitchell writes, “Listerine did not make mouthwash as
much as it made halitosis.”
• George W Bush – 2004 elections
– Iraq 2001 war
Vishwanath Ramdas

12. Why do drug dealer still live with their mothers?
• Sudhir Venkatesh – Crack gang research – Chicago –
– In a research for poverty prof William Julius Wilson
– Harvard – society - Levitt
• Competitive environment like sports where few earn bulk of the fortune
– lot of people are competing for a very few prizes
• Far worse, gang warfare was bad for business.
– If Burger King and McDonald’s launch a price war to gain market share, they partly
make up in volume what they lose in price
• Gopu44: is this the basis behind Blue Ocean Strategy
• Marketer dreams : Bring class to the masses.
– DuPont had pulled off the feat with nylon stocking 1939
– Cocaine to crack [distilling] – oscar danilo blandon – increasing purity reducing
prices
• Jim Crow Laws of segregation and Crack where the biggest hits on blacks
Vishwanath Ramdas

13. Where have all the criminals gone?
• Why did crime rise so suddenly? • Reasons given articles for crime drop [
– Laissex faire attitude [ missing deterrent from lexis nexis DB ]
and prophylactic] – Innovative policing strategies 52 L
– Increased reliance on prisons 47 L
• Wrong cause and effect – Changes in crack and other drug
– Prison attendance results in crime rate markets M 33
– Aging of the population L 32
• William brattons innovative policing – Tougher gun control laws L 32
– NY Rudolph Giuliani – Strong economy 28 L
– Broken window theory [preemptive – Increased number of police 26 M
strike] – All other explanations (increased use of
capital punishment L, concealed-
• Abortions legal in 1973 weapons laws, gun buybacks L, and
– U.S. Supreme Court’s : Roe v. Wade – others) 34
• Gopu44: Butterfly effect in crime !
• Whats the value of a fetus w.r.t to life?
– Best decided by the mother [parent]
Vishwanath Ramdas

14. For factors that determine the wage
Issue of Supply
specialized skills a job requires,
the unpleasantness of a job, and
the demand for services that the job fulfill
Vishwanath Ramdas

15. Vishwanath Ramdas

16. Steven Levitts - methods
• Collect data that define the characteristics of the phenomenon
– Crime citations in papers from Lexis Nexis DB
• Check for data independent of the phenomenon and verify
– E.g.: If crime rate fell in NY [due to policing strategies], check the same in other
cities
Vishwanath Ramdas