Freakonomics

Freakonomics refers to a fun little book that examines everyday, Seinfeld-esque phenomena with an economic eye. My sister read it and thought it was right up my alley.

The basic premise is an economic one, that if one asks the right questions, one can deduce truth via economic analysis. It is attempt to counter conventional wisdom and political correctness with hardheaded analysis of interesting phenomenon.

Some interesting findings....

1. The crime rate went down as a result of Roe v. Wade. During the mid 1990s the crime rate drastically dropped across the entire US. No one predicted this demise, especially as the early 1990s saw crime rates reaching an all time high. Experts varied in their explanations for the drop, ranging from a better economy, better policing strategies, harsher prison sentences, etc. No one looked beyond the typical, politically convenient explanations, even though a numeric, economic analysis could not establish causality. For instance, harsher sentences were applied in some places and not others, yet the crime rate went down in both locations and other economic upturns and downturns have not witnessed corresponding crime rate changes.

It turns out that when Roe v. Wade became law, the people most affected were poor women with unwanted children. More well off folks were already able to get abortions, either illegally or in the handful of states that allowed abortion at the time, including NY and California. After Roe, many poor unwanted babies, who incidentally, are the most predisposed to becoming criminals, went unborn. Therefore, in the mid 1990s we saw a considerable drop in the number of total people in the overall pool of those people most likely to become criminals. The data is supported by similar drops and increases in crime in other countries where abortion either became legal or illegal and in states, like California and New York who saw the crime rate drop earlier, prior to other states, because abortion was legal in those states earlier.

2. Real Estate agents don’t always have your best interest at heart. Levitt analyzed the sales of Real Estate agents professionally versus how Real Estate agents sold their own homes. It turns out that all things being equal, agents sell their own homes at a higher rate. The reason is due to the incentive scheme for Real Estate agents fees. An agent gets 10% of a home sale, half of which goes to their company and another half of that to taxes. A home that sells for $300,000 turns into about $7,500 into the agent’s pocket. Decent money, right. Well if the same agent sells the same house for $310,000, the agents gets $7,750. This difference is only $250 – is it worth it to the agent to put in all the extra work to sell for $10,000 for only an additional $250? To the seller, that’s a lot of scrilla, but to the agent, what incentive do they have to make that extra boost? The agent benefits most from selling two homes at $300,000 each, as opposed to one home for $320,000, even though it might take the same amount of work. As they say, however, the proof is in the numbers...

What to take away from this book? Simple. People respond to incentives. But we knew that, already, didn't we.