Vishwanath Ramdas

Freakanomics

Steven Levitt & Stephen Dubner

Vishwanath Ramdas

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

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.

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Economics is about incentives

• Some e.gs– Boston tea party due to a 2 cent tax on tea. – Thomas Jefferson – Us Revolution– High stakes testing – 2002 no child left behind law – Bush

• CEO of the Chicago Public Schools, Arne Duncan, follow-up test – Sumo wrestlers cheating – for the 8 win mark – Paul Feldman – The Bagel Man >

• White collar crime – no good data • > 10 % bagels stolen but all money safe —a tribute to the nuanced social calculus of theft.

– “The Ring of Gyges,” narrates Feldman• from Plato’s Republic.• Gyges gets a ring of invisibility and becomes evil – referred by Gloucon the student of Socrates as

evidence against his belief in the inherent goodness of people

• Richard Thaler, in his 1985 “Beer on the Beach” study,– Premium based on service aura

• Types of incentives [ how about chakra model?– Muladhara [Bhuhu]

• Identity / Ego / existence / life – Prathishtana [Bhuvaha]

• Base [Sexual] / Embarassment / Anger / Fear– Manipura [Suvaha]

• Monetary / Economic– Anahata [ Mahaha]

• Moral / Social / Relationship / Trust– Visuddhi [Janaha]

• Fame / Recognition / Control– Agna [Tapaha]

• Intellectual /Logical– Sahasrara [Satyam]

• Spiritual? / Selflessness? / Death?

• Squaring of wrong category of incentives • Incentives result in their negative side effects

– Cheating / Crime / circumvention

Vishwanath Ramdas

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

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

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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

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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

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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

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.”

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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

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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

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Where have all the criminals gone?

• Why did crime rise so suddenly?– Laissex faire attitude [ missing deterrent and prophylactic]

• Wrong cause and effect – Prison attendance results in crime rate

• William brattons innovative policing – NY Rudolph Giuliani– Broken window theory [preemptive strike]

• Abortions legal in 1973– U.S. Supreme Court’s : Roe v. Wade

• Gopu44: Butterfly effect in crime !• Whats the value of a fetus w.r.t to life?

– Best decided by the mother [parent]

• Reasons given articles for crime drop [ from lexis nexis DB ]– Innovative policing strategies 52 L– Increased reliance on prisons 47 L– Changes in crack and other drug markets M 33 – Aging of the population L 32 – Tougher gun control laws L 32 – Strong economy 28 L– Increased number of police 26 M– All other explanations (increased use of capital punishment L, concealed-weapons laws, gun

buybacks L, and – others) 34

Vishwanath Ramdas

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

Vishwanath Ramdas

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