Most people wouldn’t have much faith in a book on economics titled “Freakonomics.”
But you might reconsider when you learn the co-author is a highly acclaimed economist at the University of Chicago and a recipient of the John Bates Clark Medal, which is awarded every two years to the best American economist under the age of 40.
The fact that the book hit No. 2 on the New York Times best-seller list doesn’t hurt either.
“Freakonomics,” co-written by Steven D. Levitt, the aforementioned economist, and veteran journalist Stephen J. Dubner, features theories that many consider explosive.
Levitt has long been known as an unconventional economist who is more considered with how life works than with more conventional numbers or theories. The basic premise of the book is that just about everything is measurable.
He and Dubner illustrate, for example, not only how real estate agents don’t always work for the benefit of their clients, but how it is sometimes to their own benefit not to. The pair tells the tale of a crack gang that operated like a McDonald’s franchise in their book. And tells why a child living in a home that has both a gun and a swimming pool is 100 times more likely to be killed by the pool than by the gun.
Not surprisingly, the authors’ main goal is to show how life’s conventional wisdom is so often wrong. They achieve their goal with stunning, fascinating and thought-provoking success. Their plans are to continue their efforts in future books, on their blog at freakonomics.com and in a monthly column for the New York Times Magazine, which premiered June 5.
“Freakonomics” co-author Dubner spoke with Bankrate about some of the real-world applications of Levitt’s theories, and how so much of what we know is just plain wrong.
Bankrate: You talk about how it usually doesn’t pay for real estate agents to take the time to get the best price when selling a client’s home. How might the section on real estate agents apply to other finance professionals — such as stockbrokers or financial advisers — and how can people use Freakonomics-type thinking to ensure that their own money is being handled correctly?
Stephen J. Dubner: There’s a ton of economics literature showing that most stockbrokers, mutual fund managers, etc., are just terrible. The most valuable asset — as anyone in the business knows — is information that is real, dependable and preferably early. Then there is the element of incentives: Again, anyone in the business already spends a lot of time figuring out the incentives, hidden and transparent, that everyone else is working with. But most consumers seem to prefer trusting the “experts,” which is often a pretty bad move.
Bankrate: Has working with Steven Levitt over the years and writing this book changed the way you think about and handle your own finances?
Stephen J. Dubner: I have to say, I was already pretty skeptical coming into this project. That mostly comes from my wife, who grew up in New York, the daughter of a businessman, and is usually able to sniff out in about four seconds the crossed and hidden incentives at play, whether in a department store or a real-estate deal. But yes, working with Levitt has made me about 100-percent smarter, which means that I’m nearly a third as smart as him.
For example, I did handle a couple real estate deals rather differently than I might have. Thanks to Levitt, I understood that when I was selling a property, the agent couldn’t give a hoot about an extra $10,000, since his share was only $150. He was happy to price it low in order to move it fast, and I wasn’t having any of that. In fact, the way I picked my agent was very much informed by my understanding of agents’ incentives. And then when we were buying a property, I knew that the seller’s agent didn’t have much incentive to squeeze me for all she could.
Bankrate: You show how a crack gang applied the lessons of corporate finance to managing their business. Were there any lessons you saw from that enterprise, or other unconventional enterprises, that might go the other way, that the traditional business world can learn from a renegade operation?
Stephen J. Dubner: Well, the great thing about the crack gang is that it represents unfettered capitalism: no regulation, no taxes, no minimum wage. And what you see is a business that is quite remarkably similar to American corporations, though a little bit more so. The one thing the crack gang does that American businesses have been moving away from is fully employing the tournament model, the same model evident in Hollywood, in pro sports, etc. In the crack gang, a street-level dealer earns only $3.30 an hour and has a huge chance of getting killed or arrested, but he’s willing to do so in order to move up the ranks and grab a top spot. The problem is, those spots are very, very precious, and there are thousands of people just like him who want a shot. So they’re willing to work long and hard just for an opportunity, kind of like playing the lottery. It’s super cutthroat. While some legitimate American businesses still work like this, most companies have been conditioned or shamed into discouraging this kind of competition.
Bankrate: The book mentions that many corporations and scientific and government institutions reach out to Levitt for his assistance. What are some of the ways he has worked, or is working with, corporations, and can you name some work he has done that we might see the effects of in our everyday lives?
Stephen J. Dubner: Well, he’s trying to address traffic jams. That would be nice. Terrorism, too. That would be even nicer. The great thing about Levitt is that his brain is a great tool that, while steeped in economics, is very good at applying economics to any real-world dilemma. We’re also working with a great medical database that, after a few years’ work, may reveal some fascinating and really useful ideas about modern medicine. What we’re essentially trying to do is tell good doctors from bad ones, in a way that will be helpful to any patient in the future.
Bankrate: When a book has the word “economics” on it, I think people expect lots of numbers, complex theories and equations. This almost reads more like what I would consider a sociology book. Do you think most people misunderstand what economics really is, or is Levitt just approaching the field it in a really unique way?
Stephen J. Dubner: Both: People do misunderstand economics, and Levitt also approaches the field in a unique way. As he puts it, most people consider economics a subject matter, one that covers interest rates, inflation, the stock market, currency, etc. But in fact it’s a social science, a toolbox really, which when married with some creative thinking, can measure things that otherwise might appear immeasurable. It’s also worth remembering that Adam Smith, the founder of classical economics, was foremost a philosopher. Economics really is a good lens if you want to look at the world in a critical, clear-eyed way.
Bankrate: How has the process of writing this book changed the way you look at the world and your own everyday life?
Stephen J. Dubner: For one thing, I’m a tiny bit better at being unswayed by ill-formed conventional wisdom. I also tend to ask slightly better questions now. But the biggest difference is a great liberation from dogma. There’s a sense in polite society that there are certain boundaries you cannot cross, certain ideas you cannot mention — the fact that people cheat and lie and act in dogged self-interest, etc. But once you acknowledge that, you can shrug off the unease and get to the core of an issue. I have a much worse tolerance now for double-talk and know-nothing chatter, because I know that beneath all that chatter lies some interesting stuff, and I’m in a hurry to get to it.