“Economics is, at root, the study of incentives: how people get what they want, or need, especially when other people want or need the same thing. Economists love incentives.”
Parents of daycare kids, Chicago school teachers, and sumo wrestlers. What do they have in common? If you guessed that they all are cheaters, then your right. In this chapter Levitt and Dubner discuss the relationship between the parents that come late to pick their kids up from daycare, the teachers of Chicago who cheat to give their kids better test scores, and the lack of competition in sumo tournaments. Each of these groups have things that push them to do what they do, and this is known as incentives. When the parents were fined $3.00 for coming late, the fine wasn’t a big enough incentive to get them to do the right thing. Instead the fine almost justified them for being late. Teachers in a Chicago study apparently cheated and changed the answers on kid’s tests to the correct answers so they met the state standards, even though they were too lazy to actually teach the kids. And finally, sumo wrestlers only need to win 8 out of 7 matches to rank in a tournament so those that have already won the needed amount, might throw a match since they have less of an incentive.
Like in these situations when there isn’t an incentive pushing them to do the right thing, as humans, we tend to do the easier things, which isn’t always the best. One key to incentives though is finding that balance where people do the right thing, but without making the incentive so extreme that it causes a wrong itself. For example, the $3.00 fine wasn’t enough, but what if the fine was $300.00. (Extreme, yes, I know.) A parent who maybe had to go back to his New York City office because he forget his important brief-case, showed up a couple of minutes later, would be pretty upset to pay that fine. So then they would tell the other daycare parents, and all together the daycare would lose business. But, if that fine was increased to maybe $10.00 per child then a parent probably would push to get their on time, and the daycare service would be happy and still in business. Balance is key to incentives, and incentives is key to understanding economics.
What caused the drop of crime rate in the 1900’s? Was it the good economy and gun control laws? Yes, but mostly it was the fact that abortion was legalized in the 1970’s. It seems like such a stretch to find a correlation between the gun pointing teenagers in angst in the 1990’s, and the innocent newborns laying in their cribs in the 70’s. But there is. Without these rebelling teens being brought up in an unstable home caused by an unexpected pregnancy, the choice of abortion changed this. These criminals would never exist. And either would their acts of crime.
The relationship between the two is something that not one would normally think to be the reason behind it. At that time, like the book stated, that most people in the 1990’s thought the drop of crime rates was due to other things, and the legalizing of abortion was never a reported cause. So what really causes the things around us? Can we only figure it out after everything has ended? Or can we figure it out while it’s happening?
I think we can discover the cause of things before, during, and after something happens, it’s just a matter of opening your eyes and seeing that hidden side. Maybe since those children weren’t born in the 1970’s then we would’ve had the discovery of things, such as the cure for cancer. But isn’t that the point of innovation? Uncovering all the what-ifs of the world?
So back to my brief-case holding economist. Maybe there’s nothing in his briefcase, and he holds it so people, like me, think he knows what he is doing so I pay him more for his economic advice. Or maybe he holds it to show the people he grew up with that even though his mother had gave birth to him unexpectedly and he grew up in hard family, that he could make something of himself. Or maybe…just maybe, the cure for cancer is hidden in that briefcase. Just maybe.
“Steven Levitt tends to see things differently than the average person. Differently, too, than the average economist. This is either a wonderful trait or a troubling one, depending on how you feel about economists.” – The New York Times Magazine, August 3, 2003
Both Levitt and Dubner think very differently from not only the average person, but also the average economists. In their explanatory note I definitely realized this. How they see the world, and why they see people acting the way they do is what does make them “freaks” in the economic world. In their note to the reader you can tell they want you to see the world of economists in a different light.
When I think of economists I see a group of dark-haired, brief case carrying men in synchronized steps walking the streets of their New York City to their offices on the thirty-fifth floor flirting with their assistant on the way in. Then comes a day of punching numbers into a calculator, claiming to have all the answers of the world.
Dubner and Levitt’s ideas are based off of ideas, people’s thoughts, incentives, and then backed by the numbers. That slight variance is truly what makes all the difference. Throughout the rest of this book I hope my view of economics is changed by this idea. No longer with those brief case men be blocking my view, but instead I’ll hopefully understand why they carry that briefcase. Because that is what economics is: Understanding the hidden side of everything.
“Prepare to be dazzled.” – Malcolm Gladwell
This is my first post of the understanding behind the book “Freakonomics” by Steven D. Levitt and Stephen J. Dubner. Throughout my blog I will be unraveling the hidden key of economics found within this book and relating it to our local economic state. Here we go!