15 July 2012

Freakonomics - Levitt 2006

Freakonomics, Levitt and Dubner, 2006
  • Incentives are the cornerstone of modern life
  • Conventional wisdon is often wrong
  • Experts use their own informational advantage to server their own agenda
  • Knowing wht to measure and how simplifies a complicated world

Incentives/deterrents can be economic, moral (I feel good about it) and social (pressure from society, shame). Experiment: The first rule was "Parents must pick up their kids before 5pm". When this rule was in place, only a few parents picked up their kids late. When changing the rule to "Parents who pick up their kids late are charged $3", many more parents picked up their kids late. Parents who used to feel morally responsible could now buy off their guilt. And the low fine signaled that it was no big deal to pick up your kids late. In the same "vein" of examples, paying people $5 to give blood results in less donors. Replacing the moral incentive by an economic one changed the way they saw the situation: while saving lives could justify the hassle/pain, $5 is not enough. People also cheat to abuse the incentive and get more for less. Cheating is more likely to happen for clear outcomes (e.g. sports or politics) than if the benefit or its recipient are not obvious.

Asymmetric information: people with exclusive info can cause fear (e.g. the USA don't know when terrorists are going to attack) and respect/gratitude (e.g. experts such as realtor agents know how much your house is worth on the market, or doctor can tell what disease you have). Internet is decreasing the information asymmetry. Experts need journalists to spread their opinion, but journalists need experts to write about new interesting/provocative topics.

What people say is not what people do. Examples: profiles on dating websites (most people rate their look "above average"), or voting for extreme right (people are ashamed?).

Four factors determine wage: specialized skill, unpleasantness, demand for the job, and supply of workers. That's why prostitutes earn more than architects per hour.

Risk: We suck at assessing risk: we measure it (implicitly) as risk = hazard + fear, while it should only be risk = hazard. When fear > hazard, we over-react. Hence the most hazardous risks are not always the scariest. Risks we don't have control over are scarier, while familiarity decreases fear. [This echoes the class on stress] Examples: heart attacks cause more deaths than terrorist attacks, yet people still eat fast-food. People fear more plane accidents than car accidents, even though they happen as often per hour spent in them.

[Except the first 2 chapters, I found this book focused too much on poor Blacks vs rich Whites.]

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