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Freakonomics - Concepts and Application

A presentation on the concepts and learning from the book \'Freakonomics\' - a few examples from daily life.

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Freakonomics - Concepts and Application

  3. <ul><li>Steven D. Levitt </li></ul><ul><li>Professor of Economics at the University of Chicago </li></ul><ul><li>John Bates Clark Medal - the most influential economist in America under the age of 40 </li></ul><ul><li>Time magazine's &quot;100 People Who Shape Our World.&quot; </li></ul><ul><li>B.A. from Harvard University in 1989, Ph.D. from M.I.T. in 1994, has taught at Chicago since 1997. </li></ul>
  4. Questions! <ul><li>What do schoolteachers and Sumo wrestlers have in common? </li></ul><ul><li>How is the Ku Klux Klan like a group of real-estate agents? </li></ul><ul><li>Why do drug-dealers still live their moms? </li></ul>
  5. Concepts in ‘Freakonomics’ <ul><li>Incentives are the cornerstone of economic life </li></ul><ul><li>The conventional wisdom is often wrong </li></ul><ul><li>Dramatic effects often have distant, even subtle, causes </li></ul><ul><li>Experts use their informational advantage to serve their own agenda </li></ul><ul><li>Knowing what to measure and how to measure it makes life simpler </li></ul>
  6. What we shall discuss: <ul><li>Incentives </li></ul><ul><li>‘ Snob’ effect </li></ul><ul><li>Information Asymmetry </li></ul><ul><li>Correlation v/s Causation </li></ul><ul><li>Conventional Wisdom </li></ul><ul><li>‘ Winner take all’ labour market </li></ul>
  7. Incentives
  8. Types of Incentives <ul><li>“ a means of urging people to do more of a good thing and less of a bad thing” </li></ul><ul><li>Conventional wisdom turns to be “wrong” </li></ul><ul><li>“ Economists love </li></ul><ul><li>incentives” </li></ul><ul><li>1.1 Economic </li></ul><ul><li>1.2 Social </li></ul><ul><li>1.3 Moral </li></ul>
  9. Economic Incentive <ul><li>are those which people respond to in a market place </li></ul><ul><li>Discounts </li></ul><ul><li>Bonuses </li></ul><ul><li>Fines – Libraries, Traffic </li></ul>
  10. Social Incentive <ul><li>“ Urge people to do things in a way that is accepted by all” </li></ul><ul><li>Consequences of Social Networks in Workplace </li></ul><ul><ul><li>Presence of friends affects productivity </li></ul></ul><ul><ul><li>Workers conform to a norm </li></ul></ul><ul><ul><li>Overall effect on firm performance? </li></ul></ul><ul><li>Parallel can be drawn upon on CGPA </li></ul>
  11. Moral Incentive <ul><li>“ Appealing to the sense of a person’s right vs wrong” </li></ul><ul><li>Advertising </li></ul><ul><li>Donations </li></ul><ul><li>CSR </li></ul>
  12. Why People Cheat <ul><li>“ Something worth having is something worth cheating for” </li></ul><ul><li>Examples of cheating </li></ul><ul><ul><li>Class Teachers </li></ul></ul><ul><ul><li>Sumo Wrestlers </li></ul></ul><ul><li>Not Always True </li></ul><ul><ul><li>Bagel Example </li></ul></ul>
  13. Conflicting Incentives <ul><li>What do you expect to happen when a fine is imposed on parents who do not pick up their children from the day care centre on time? </li></ul>
  15. Snob Effect
  16. Snob Effect <ul><li>“ Desire to own exclusive or unique goods” </li></ul><ul><li>Demand increased with price </li></ul><ul><li>Art, Designer Clothes, Sports Cars, Stamps, Coins </li></ul><ul><li>Mac users </li></ul><ul><ul><li>Tooth-whitening products </li></ul></ul><ul><ul><li>Starbucks </li></ul></ul><ul><ul><li>Organic food </li></ul></ul><ul><ul><li>Hybrid cars </li></ul></ul>
  17. Information Asymmetry
  18. Information Asymmetry <ul><li>One party has more info than the other </li></ul><ul><ul><li>Sellers > Buyers </li></ul></ul><ul><ul><li>Buyers > Sellers </li></ul></ul>
  19. Market for Lemons <ul><li>Relates quality and uncertainty </li></ul><ul><ul><li>Bad cars drive out good </li></ul></ul><ul><ul><li>Impossible for buyer to distinguish </li></ul></ul><ul><li>Economic cost of dishonesty </li></ul>
  20. Other examples.. <ul><li>Insurance market for the elderly </li></ul><ul><li>Credit market in rural India </li></ul><ul><ul><li>Local moneylender v/s Banks </li></ul></ul>
  21. Counteracting Info. Asymm. <ul><li>Guarantees </li></ul><ul><ul><li>Risk borne by seller than buyer </li></ul></ul><ul><li>Brand-name good </li></ul><ul><li>Licensing </li></ul><ul><ul><li>ISI mark </li></ul></ul><ul><ul><li>The IIT degree, in our case </li></ul></ul><ul><ul><li>Nobel Prizes! </li></ul></ul>
  22. Correlation & Causation
  23. Olympic Medals and GDP! <ul><ul><ul><ul><ul><li>= </li></ul></ul></ul></ul></ul>
  24. Factors <ul><li>Population </li></ul><ul><li>GDP </li></ul><ul><li>Influence of Soviet Union </li></ul><ul><ul><li>Political importance of sports </li></ul></ul><ul><li>Host or not? </li></ul><ul><ul><li>“ Home-advantage” </li></ul></ul><ul><li>Medals in the previous editions </li></ul>
  26. <ul><li>Total Medals </li></ul><ul><li>Actual </li></ul><ul><li>USA </li></ul><ul><li>China </li></ul><ul><li>Russia </li></ul><ul><li>Britain </li></ul><ul><li>Australia </li></ul><ul><li>Germany </li></ul><ul><li>France </li></ul><ul><li>South Korea </li></ul><ul><li>Italy </li></ul><ul><li>Ukraine </li></ul><ul><li>Total Medals </li></ul><ul><li>Predicted </li></ul><ul><li>China </li></ul><ul><li>USA </li></ul><ul><li>Russia </li></ul><ul><li>Germany </li></ul><ul><li>Australia </li></ul><ul><li>Japan </li></ul><ul><li>France </li></ul><ul><li>Italy </li></ul><ul><li>Britain </li></ul><ul><li>South Korea </li></ul>
  27. <ul><li>Top 30 countries will win 82 % medals </li></ul><ul><li>Top 30 countries account for 84 % GDP </li></ul><ul><li>A University of South Australia analysis found that one gold medal typically costs a country $37 million in training funds </li></ul>
  28. Conventional Wisdom
  29. Conventional Wisdom <ul><li>Explanations that are generally accepted as true </li></ul><ul><li>Conventional Wisdom is not necessarily true </li></ul>
  30. Creation of Conventional Wisdom <ul><li>Often, conventional wisdom is generated by experts and journalists </li></ul><ul><li>Advertising is a great tool for creating conventional wisdom </li></ul>
  31. Conventional Wisdom <ul><li>A typical drug dealer’s resources? </li></ul>
  32. In Reality <ul><li>Most of the people involved in illicit drug trade earn less than the minimum wage and have legitimate jobs to supplement their earnings </li></ul><ul><li>It is also a highly dangerous job </li></ul><ul><li>A drug dealing gang is very similar to a capitalist enterprise like McDonald’s </li></ul>
  33. Why do it then? <ul><li>To succeed in an extremely competitive field </li></ul><ul><li>Every street dealer aspires to one day reach the top of the pyramid </li></ul><ul><li>This constitutes a “Winner-take-all” market </li></ul>
  34. Winner-take-all Market
  35. Winner-take-all Market <ul><li>Large amount of competition for a few highly coveted positions </li></ul><ul><li>The positions usually have a lot of money, fame and respect associated with them </li></ul>
  36. Winner-take-all Market <ul><li>Everyone usually starts off at the same level </li></ul><ul><li>The large competition leads to measly pay at the lower levels </li></ul><ul><li>The pyramid has a tiny apex and a very large base </li></ul>
  37. The tragedy of the commons <ul><li>If there is only one player in a winner-take-all market, adding a second player might significantly improve the market output </li></ul><ul><li>But if there are already a large number, adding more players will only marginally increase the market output and these players will contribute less to the economy than if they were in some other field </li></ul>
  38. Winner-take-all Market <ul><li>Once a firm in such a market gets a considerable lead it is very difficult for other firms to catch-up </li></ul><ul><li>Case-in-point – Google: </li></ul><ul><ul><li>The search engine market has zero switching cost </li></ul></ul><ul><ul><li>Google had a better product than others and this gave them a huge market lead </li></ul></ul><ul><ul><li>Even if it has a marginally better product now users will not switch their preferred search engine </li></ul></ul><ul><ul><li>Even if the competitors have an identical product now, they still have to overcome the “brand perception gap” </li></ul></ul><ul><ul><li>Economic and social forces form a positive feedback loop for the leader </li></ul></ul>
  39. Education <ul><li>Number of students applying to a University depends on the ranking of the University </li></ul><ul><li>The better students go to the higher ranked universities </li></ul><ul><li>A positive feedback loop is formed </li></ul>
  40. Impact of New Technology <ul><li>Personal Computer </li></ul><ul><ul><li>Computers were limited to large organisations </li></ul></ul><ul><ul><li>IBM was the leader in making computers for large corporations </li></ul></ul><ul><ul><li>Apple came out with a Personal Computer which revolutionised the market and gave it the market lead </li></ul></ul>
  41. Impact of New Technology <ul><li>Nylon Stockings </li></ul><ul><ul><li>Stockings were made of silk </li></ul></ul><ul><ul><li>In 1939 DuPont introduced nylon stockings </li></ul></ul><ul><ul><li>Sold 64 million pairs by 1941 </li></ul></ul>
  42. References <ul><li>Freakonomics by Steven Levitt and Stephen Dubner </li></ul><ul><li>Higher Education: The Ultimate Winner-Take-All Market? by Robert H. Frank </li></ul><ul><li>The Market for “Lemons” by George A Akerlof, 1970 </li></ul><ul><li>Modelling Olympic Performance by PWC, June 2008 </li></ul><ul><li>DailyTech </li></ul><ul><li> </li></ul><ul><li> </li></ul><ul><li> </li></ul><ul><li> </li></ul><ul><li> </li></ul>
  43. M N Varun ED05B010 Karthik M ED05B012 Vikas Shenoy ED05B026
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A presentation on the concepts and learning from the book \'Freakonomics\' - a few examples from daily life.


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