FREAKONOMICS A ROGUE ECONOMIST EXPLORES THE HIDDEN SIDE

FREAKONOMICS: A ROGUE ECONOMIST EXPLORES THE HIDDEN SIDE OF EVERYTHING Jake Affanato

If morality represents how people would like the world to work, then economics shows how it actually does work. Why the conventional wisdom is so often wrong…How “experts”—from criminologists to real-estate agents to political scientists—bend the facts…Why knowing what to measure, and how to measure it, is the key to understanding modern life…What is “freakonomics, ” anyway? INTRODUCTION: THE HIDDEN SIDE OF EVERYTHING

Setting the Stage: America in 1990 • In the early 90 s, the nightly news or daily papers were plagued with incidents of violent crimes. – Crime rates had been rising relentlessly and things were about to get worse—all the experts were saying so! • In 1995, criminologist James Alan Fox wrote a report that grimly detailed the coming spike in murders by teenagers:

• And then, instead of going up, crime began to fall. And fall and fall some more. • Even though the experts had failed to anticipate the crime drop, they now hurried to explain it: – The roaring 1990 s economy helped turn back crime. – Proliferation of gun control laws. – Innovating policing strategies put into place in NYC (murders fell from 2, 245 in 1990 to 596 in 2003)

Reported violent crime rate in the United States from 1990 to 2015 This graph shows the reported violent crime rate in the U. S. since 1990. In 1990, the nationwide rate was 729. 6 cases per 100, 000 of the population.

Conventional Wisdom • These theories were not only logical; they were also encouraging, since they attributed the crime drop to specific and recent human initiatives. • These theories made their way from the experts’ mouths to journalists’ ears to the public’s mind, becoming conventional wisdom. • There was another factor, meanwhile, that had greatly contributed to the massive crime drop of the 1990 s

So, what is Freakonomics? • Freakonomics seeks to “[strip] a layer or two from the surface of modern life and [see] what is happening underneath. ” • Answers may often seem odd but, after the fact, also rather obvious. – These answers will be sought in the data—whether those data come in the form of schoolchildren’s test scores or New York City’s Crime statistics or a crack dealer’s financial records. • Morality represents the way people would like the world to work—whereas economics represents how it actually does work.

Enduring Questions • Are incentives the cornerstone of contemperary life? • Is the conventional wisdom often wrong? • Do dramatic effects originate in distant, even subtle, causes? • Do “experts”—from criminologists to real-estate agents—use their informational advantage to serve their own agenda? • Does knowing what to measure and how to measure it make a complicated world much less so?

In which we explore the beauty of incentives, as well as their dark side—cheating. Who cheats? Just about everyone. . . How cheaters cheat, and how to catch them. . . Stories from an Israeli day-care center. . . The sudden disappearance of seven million American children. . . Cheating schoolteachers in Chicago. . . Why cheating to lose is worse than cheating to win. . . Could sumo wrestling, the national sport of Japan, be corrupt? . . . What the Bagel Man saw: mankind may be more honest than we think. WHAT DO SCHOOLTEACHERS AND SUMO WRESTLERS HAVE IN COMMON?

Tardy Parents & Daycare • Imagine for a moment that you are the manager of a day-care center • Why, after all, should the day-care center take care of these kids for free? – The solution: fine them. Simple enough, right? • Two economists decided to test this solution by conducting a study of ten day-care centers in Haifa, Israel

Creating a Control • For the first four weeks, the economists simply kept track of the number of parents who came late: – There were, on average, eight late pickups per week per daycare center. • In the fifth week, the fine was enacted

The Outcome • After the fine was enacted, the number of late pickups promptly went. . . up. – The incentive had plainly backfired. • 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.

Types of Incentives • There are three basic flavors of incentive: economic, social, and moral. • Think about the anti-smoking campaign of recent years: – The addition of a $3 -per-pack “sin tax” is a strong economic incentive against buying cigarettes. – The banning of cigarettes in restaurants and bars is a powerful social incentive. – And when the U. S. government asserts that terrorists raise money by selling black-market cigarettes, that acts as a rather jarring moral incentive.

Incentives Schemes: A Trade-Off • The $3 fine was simply too small. – As babysitting goes, that’s pretty cheap • There was another problem with the day-care center fine: – It substituted an economic incentive (the $3 penalty) for a moral incentive (the guilt that parents were supposed to feel when they came late). • Indeed, when the economists eliminated the $3 fine in the seventeenth week of their study, the number of late-arriving parents didn’t change.

Who Cheats? • Well, just about anyone, if the stakes are right. • For every clever person who goes to the trouble of creating an incentive scheme, there is an army of people who will inevitably spend even more time trying to beat it. – Cheating is a primordial economic act: getting more for less. • Some cheating leaves barely a shadow of evidence. In other cases, the evidence is glaring.

The Worst Kidnapping Wave in History? • Consider what happened one spring evening at midnight in 1987: seven million American children suddenly disappeared. – It was the night of April 15, and the IRS had just changed a rule: instead of merely listing the name of each dependent child, tax filers were now required to provide a Social Security number. – Suddenly, seven million children—children who had existed only as phantom exemptions on the previous year’s 1040 forms—vanished, representing about one in ten of all dependent children in the United States.

The Chicago Public Schools & High Stakes Testing • The Chicago Public Schools (CPS) educates nearly 400, 000 kids each year • The Chicago Public School (CPS) system embraced high-stakes testing in 1996. • The most volatile current debate among American school administrators, teachers, parents, and students concerns “high-stakes” testing.

Incentives to Cheat • Schoolchildren have had incentive to cheat for as long as there have been tests. • With high-stakes testing, a teacher whose students test poorly can be censured or passed over for a raise or promotion. • If the entire school does poorly, federal funding can be withheld; if the school is put on probation, the teacher stands to be fired. • High-stakes testing also presents teachers with some positive incentives.

How might a teacher go about cheating? • A fifth-grade student in Oakland recently came home from school and told her mother that her teacher had written the answers to the state exam right there on the board. • There are more nuanced ways to inflate students’ scores:

Calculated Measures: Flying Under the Radar • If you were willing to erase your students’ wrong answers and fill in correct ones, you probably wouldn’t want to change too many wrong answers. • You probably wouldn’t even want to change answers on every student’s test – So what you might do is select a string of eight or ten consecutive questions and fill in the correct answers for, say, one-half or two-thirds of your students.

To catch a cheater, it helps to think like one • Unusual answer patterns in a given classroom: blocks of identical answers, for instance, especially among the harder questions. • A strange pattern within any one student’s • Students who performed far better than their past scores would have predicted and who then went on to score significantly lower the following year.

Case Study: The CPS • The Chicago Public School system made available a database of the test answers for every CPS student from third grade through seventh grade from 1993 to 2000. • Consider now the answer strings from the students in two sixth grade Chicago classrooms who took the identical math test. • Each horizontal row represents one student’s answers. – The letter a, b, c, or d indicates a correct answer. – A number indicates a wrong answer, with 1 corresponding to a, 2 corresponding to b, and so on. – A zero represents an answer that was left blank.

Classroom A db 3 a 431422 bd 131 b 4413 cd 422 a 1 acda 332342 d 3 ab 4 c 4 d 1 aa 1 a 11 acb 2 d 3 dbc 1 ca 22 c 23242 c 3 a 142 b 3 adb 243 c 1 d 42 a 12 d 2 a 4 b 1 d 32 b 21 ca 2312 a 3411 d 0000000 3 b 2 a 34344 c 32 d 21 b 1123 cdc 00000000000 34 aabad 12 cbdd 3 d 4 c 1 ca 112 cad 2 ccd 0000000 d 33 a 3431 a 2 b 2 d 2 d 44 b 2 acd 2 cad 2 c 2223 b 400000 23 aa 32 d 2 a 1 bd 2431141342 c 13 d 212 d 233 c 34 a 3 b 3 b 000 d 32234 d 4 a 1 bdd 23 b 242 a 22 c 2 a 1 a 1 cda 2 b 1 baa 33 a 0000 d 3 aab 23 c 4 cbddadb 23 c 322 c 2 a 222223232 b 443 b 24 bc 3 d 13 a 14313 c 31 d 42 b 14 c 421 c 42332 cd 2242 b 3433 a 3343 d 13 a 3 ad 122 b 1 da 2 b 11242 dc 1 a 3 a 1210000000 d 12 a 3 ad 1 a 13 d 23 d 3 cb 2 a 21 ccada 24 d 2131 b 440000000 314 a 133 c 4 cbd 142141 ca 424 cad 34 c 122413223 ba 4 b 40 d 42 a 3 adcacbddadbc 42 ac 2 c 2 ada 2 cda 341 baa 3 b 24321 db 1134 dc 2 cb 2 dadb 24 c 412 c 1 ada 2 c 3 a 341 ba 20000000 d 1341431 acbddad 3 c 4 c 213412 da 22 d 3 d 1132 a 1344 b 1 b 1 ba 41 a 21 a 1 b 2 dadb 24 ca 22 c 1 ada 2 cd 3241320000 dbaa 33 d 2 a 2 bddadbcbca 11 c 2 a 2 accda 1 b 2 ba 20000000 Classroom B 112 a 4 a 342 cb 214 d 0001 acd 24 a 3 a 12 dadbcb 4 a 0000000 d 4 a 2341 cacbddad 3142 a 2344 a 2 ac 23421 c 00 adb 4 b 3 cb 1 b 2 a 34 d 4 ac 42 d 23 b 141 acd 24 a 3 a 12 dadbcb 4 a 2134141 dbaab 3 dcacb 1 dadbc 42 ac 2 cc 31012 dadbcb 4 adb 40000 d 12443 d 43232 d 32323 c 213 c 22 d 2 c 23234 c 332 db 4 b 300 db 2 abad 1 acbdda 212 b 1 acd 24 a 3 a 12 dadbcb 40000 d 4 aab 2124 cbddadbcb 1 a 42 cca 3412 dadbcb 423134 bc 1 1 b 33 b 4 d 4 a 2 b 1 dadbc 3 ca 22 c 00000000000 d 43 a 3 a 24 acb 1 d 32 b 412 acd 24 a 3 a 12 dadbcb 422143 bc 0 313 a 3 ad 1 ac 3 d 2 a 23431223 c 000012 dadbcb 40000 db 2 a 33 dcacbd 32 d 313 c 21142323 cc 30000000 d 43 ab 4 d 1 ac 3 dd 43421240 d 24 a 3 a 12 dadbcb 40000 db 223 a 24 acb 11 a 3 b 24 cacd 12 a 241 cdadbcb 4 adb 4 b 300 db 4 abadcacb 1 dad 3141 ac 212 a 3 a 1 c 3 a 144 ba 2 db 41 b 43 1142340 c 2 cbddadb 4 b 1 acd 24 a 3 a 12 dadbcb 43 d 133 bc 4 214 ab 4 dc 4 cbdd 31 b 1 b 2213 c 4 ad 412 dadbcb 4 adb 00000 1423 b 4 d 4 a 23 d 24131413234123 a 2413 a 21441343 3 b 3 ab 4 d 14 c 3 d 2 ad 4 cbcac 1 c 003 a 12 dadbcb 4 adb 40000 dba 21 ac 3 d 2 ad 3 c 4 c 4 cd 40 a 3 a 12 dadbcb 40000 d 122 ba 2 cacbd 1 a 13211 a 2 d 02 a 2412 d 0 dbcb 4 adb 4 b 3 c 0 144 a 3 adc 4 cbddadbcbc 2 c 2 cc 43 a 12 dadbcb 4211 ab 343 d 43 aba 3 cacbddadbcbca 42 c 2 a 3212 dadbcb 42344 b 3 cb

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 112 a 4 a 342 cb 214 d 0001 acd 24 a 3 a 12 dadbcb 4 a 0000000 1 b 2 a 34 d 4 ac 42 d 23 b 141 acd 24 a 3 a 12 dadbcb 4 a 2134141 db 2 abad 1 acbdda 212 b 1 acd 24 a 3 a 12 dadbcb 40000 d 43 a 3 a 24 acb 1 d 32 b 412 acd 24 a 3 a 12 dadbcb 422143 bc 0 1142340 c 2 cbddadb 4 b 1 acd 24 a 3 a 12 dadbcb 43 d 133 bc 4 d 43 ab 4 d 1 ac 3 dd 43421240 d 24 a 3 a 12 dadbcb 40000 dba 21 ac 3 d 2 ad 3 c 4 c 4 cd 40 a 3 a 12 dadbcb 40000 144 a 3 adc 4 cbddadbcbc 2 c 2 cc 43 a 12 dadbcb 4211 ab 343 3 b 3 ab 4 d 14 c 3 d 2 ad 4 cbcac 1 c 003 a 12 dadbcb 4 adb 40000 D 43 aba 3 cacbddadbcbca 42 c 2 a 3212 dadbcb 42344 b 3 cb 214 ab 4 dc 4 cbdd 31 b 1 b 2213 c 4 ad 412 dadbcb 4 adb 00000 313 a 3 ad 1 ac 3 d 2 a 23431223 c 000012 dadbcb 40000 d 4 aab 2124 cbddadbcb 1 a 42 cca 3412 dadbcb 423134 bc 1 dbaab 3 dcacb 1 dadbc 42 ac 2 cc 31012 dadbcb 4 adb 40000 db 223 a 24 acb 11 a 3 b 24 cacd 12 a 241 cdadbcb 4 adb 4 b 300 d 122 ba 2 cacbd 1 a 13211 a 2 d 02 a 2412 d 0 dbcb 4 adb 4 b 3 c 0 1423 b 4 d 4 a 23 d 24131413234123 a 2413 a 21441343 db 4 abadcacb 1 dad 3141 ac 212 a 3 a 1 c 3 a 144 ba 2 db 41 b 43 db 2 a 33 dcacbd 32 d 313 c 21142323 cc 30000000 1 b 33 b 4 d 4 a 2 b 1 dadbc 3 ca 22 c 00000000000 d 12443 d 43232 d 32323 c 213 c 22 d 2 c 23234 c 332 db 4 b 300 d 4 a 2341 cacbddad 3142 a 2344 a 2 ac 23421 c 00 adb 4 b 3 cb

Analysis of the Findings • Did fifteen out of twenty-two students somehow manage to reel off the same six consecutive correct answers (the d-a-d-b-c-b string) all by themselves? • It is unlikely because: – One: those questions, coming near the end of the test, were harder than the earlier questions. – Two: these were mainly subpar students to begin with, few of whom got six consecutive right answers elsewhere on the test, making it all the more unlikely they would get right the same six hard questions. – Three: up to this point in the test, the fifteen students’ answers were virtually uncorrelated. – Four: three of the students (numbers 1, 9, and 12) left more than one answer blank before the suspicious string and then ended the test with another string of blanks.

A Subtle Oddity • On nine of the fifteen tests, the six correct answers are preceded by another identical string, 3 -a-1 -2, which includes three of four incorrect answers. • And on all fifteen tests, the six correct answers are followed by the same incorrect answer, a 4.

Year-to-Year Scores of Three Students 5 TH GRADE SCORE 6 TH GRADE SCORE 7 TH GRADE SCORE Student 3 3. 0 6. 5 5. 1 Student 5 3. 6 6. 3 4. 9 Student 14 3. 8 7. 1 5. 6

Sumo Wrestling: Japan’s Pastime • In Japan, sumo is not only the national sport but also a repository of the country’s religious, military, and historical emotion. • Sumo is said to be less about competition than about honor itself.

Cheating and Sports • It is true that sports and cheating go hand in hand. – That’s because cheating is more common in the face of a bright-line incentive (the line between winning and losing, for instance) than with a murky incentive. • An athlete who gets caught cheating is generally condemned, but most fans at least appreciate his motive: he wanted so badly to win that he bent the rules. • An athlete who cheats to lose, meanwhile, is consigned to a deep circle of sporting hell.

If cheating to lose is sport’s premier sin, and if sumo wrestling is the premier sport of a great nation, cheating to lose couldn’t possibly exist in sumo. Could it?

The Sumo Hierarchy • The incentive scheme that rules sumo is intricate and extraordinarily powerful. • Each wrestler maintains a ranking that affects every slice of his life: • The sixty-six highest-ranked wrestlers in Japan, comprising the makuuchi and juryo divisions, make up the sumo elite. – A wrestler near the top of this elite pyramid may earn millions and is treated like royalty. – Any wrestler in the top forty earns at least $170, 000 a year. – The seventieth-ranked wrestler in Japan, meanwhile, earns only $15, 000 a year.

Incentives and Data • A wrestler’s ranking is based on his performance in the elite tournaments that are held six times a year. – Each wrestler has fifteen bouts per tournament, one per day over fifteen consecutive days. • If he finishes the tournament with a winning record (eight victories or better), his ranking will rise. – If he has a losing record, his ranking falls. 7– 7 WRESTLER’S PREDICTED WIN PERCENTAGE AGAINST 8– 6 OPPONENT 7– 7 WRESTLER’S ACTUAL WIN PERCENTAGE AGAINST 8– 6 OPPONENT 48. 7 79. 6

Interpreting the Data • So the 7– 7 wrestler, based on past outcomes, was expected to win just less than half the time. – This makes sense; their records in this tournament indicate that the 8– 6 wrestler is slightly better. • Now let’s look at the win-loss percentage between the 7– 7 wrestlers and the 8– 6 wrestlers the next time they meet, when neither one is on the bubble. – As it turns out, the data show that the 7– 7 wrestlers win only 40 percent of the rematches.

In which it is argued that nothing is more powerful than information, especially when its power is abused. Spilling the Ku Klux Klan’s secrets. . . Why experts of every kind are in the perfect position to exploit you. . . The antidote to information abuse: the Internet. . . Why a new car is suddenly worth so much less the moment it leaves the lot. . . Breaking the real-estate agent code: what “well maintained” really means. . . Is Trent Lott more racist than the average Weakest Link contestant? . . . What do online daters lie about? HOW IS THE KU KLUX KLAN LIKE A GROUP OF REAL ESTATE AGENTS?

Historical Overview: The KKK • The Ku Klux Klan has had a markedly up-and-down history. • The Klan evolved into a multistate terrorist organization designed to frighten and kill emancipated slaves. – The early Klan did its work through pamphleteering, lynching, shooting, burning, castrating, pistol-whipping, et al. • But within barely a decade, the Klan had been extinguished, largely by legal and military interventions out of Washington, D. C. – Even if the Klan itself was defeated, however, its aims had largely been achieved through the establishment of Jim Crow laws.

The Resurgence of the Klan “At last there had sprung into existence a great Ku Klux Klan, a veritable empire of the South, to protect the Southern country. ” – Woodrow Wilson • The Ku Klux Klan lay largely dormant until 1915, when D. W. Griffith’s film The Birth of a Nation (originally titled The Clansman) helped spark its rebirth. • By the 1920 s, a revived Klan claimed eight million members. • The Klan’s real power lay in the very public fear that it fostered: – The Ku Klux Klan and the law-enforcement establishment were brothers in arms. • The public was frightened and felt powerless to act against the Klan.

Stetson Kennedy’s War on Bigotry “Almost all of the things written on the subject were editorials, not exposés, ” Kennedy would later explain. “The writers were against the Klan, all right, but they had precious few inside facts about it. ” • Raised in a reputable family, with some distant ties to the Klan. • Kennedy set out to expose the Klan for its smallmindedness, ignorance, obstructionism, and intimidation. • Kennedy set out to gather those facts and partnered with John Brown • The Klan Unmasked exploits his “inside” experience with Klan

Cracking the Code • There was a great deal of information to be gleaned from this Brown/Kennedy collaboration. • The identities of the Klan’s local and regional leaders; their upcoming plans; the Klan’s current rituals, passwords, and language: – It was Klan custom, for instance, to append a Kl to many words. • When a traveling Klansman wanted to locate brethren in a strange town, he would ask for a “Mr. Ayak”—“Ayak” being code for “Are You a Klansman? ” He would hope to hear this response: “Yes, and I also know a Mr. Akai”—code for “A Klansman Am I. ”

Decade-by. Decade Statistics On The Lynching Of Blacks In The United States: A central tenet of life in the Klan—and of terrorism in general—is that most of the threatened violence never goes beyond the threat stage. YEARS LYNCHINGS OF BLACKS 1890— 1899 1, 111 1900— 1909 791 1910— 1919 569 1920— 1929 281 1930— 1939 119 1940— 1949 31 1950— 1959 6 1960— 1969 3

Examining the Evidence • The statistics reveal at least three noteworthy facts. 1. The decrease in lynchings over time. 2. Absence of a correlation between lynchings and Klan membership which suggests that the Ku Klux Klan carried out far fewer lynchings than is generally thought. 3. Lynchings were exceedingly rare, relative to the size of the black population. • The most compelling explanation is that all those early lynchings worked.

The Fall of the Klan • Kennedy was therefore eager to damage the Klan in any way he could. – The problem was that most of Kennedy’s efforts weren’t producing the desired effect. – The Klan was so entrenched and broad-based that Kennedy felt as if he were tossing pebbles at a giant. • Kennedy turned to the most powerful mass medium of his day: radio. • Although the Klan would never quite die, it was certainly handicapped by Kennedy’s brazen dissemination of inside information.

Life Insurance Premiums in 1990 • In the late 1990 s, the price of term life insurance fell dramatically. – However, other types of insurance, including health and automobile and homeowners’ coverage, continued to rise in price. • The role of the World Wide Web: – Shopping around for the cheapest policy, a process that had been convoluted and time-consuming, was suddenly made simple. • It is worth noting that these websites only listed prices; they didn’t even sell the policies. – It wasn’t really insurance they were peddling; they were dealing in information.

Knowledge is Power • The day that a car is driven off the lot is the worst day in its life, for it instantly loses as much as a quarter of its value. • The only person who might logically want to resell a brand-new car is someone who found the car to be a lemon. – Even if the car isn’t a lemon, a potential buyer assumes that it is.

Information Asymmetry • We accept as a verity of capitalism that someone (usually an expert) knows more than someone else (usually a consumer). • Asymmetrical information: situations in which an expert uses his informational advantage to make us feel stupid or rushed or cheap or ignoble. • As a medium, the Internet is brilliantly efficient at shifting information from the hands of those who have it into the hands of those who do not. – Often, as in the case of term life insurance prices, the information existed but in a woefully scattered way. • The Internet, powerful as it is, has hardly slain the beast that is information asymmetry.

Home for Sale • Selling a house is typically the largest financial transaction in your life, and you probably have scant experience in real estate. • Your real-estate agent is the one with all the information. – Too bad she sees things differently. A real-estate agent may see you not so much as an ally but as a mark.

Our Own Self Interest • A study found that an agent keeps her own house on the market an average ten extra days, waiting for a better offer, and sells it for over 3% more than your house. • The problem is that the agent only stands to personally gain an additional $150 by selling your house for $10, 000 more, which isn’t much reward for a lot of extra work. • So her job is to convince you that a $300, 000 offer is in fact a very good offer, even a generous one, and that only a fool would refuse it.

Real-Estate Jargon • A phrase like “well maintained, ” for instance, is as full of meaning to an agent as “Mr. Ayak” was to a Klansman. • An analysis of the language used in real-estate ads shows that certain words are powerfully correlated with the final sale price of a house.

Ten Common Real-Estate Ad Terms A “fantastic” house is surely fantastic enough to warrant a high price, isn’t it? What about a “charming” and “spacious” house in a “great neighborhood!”? No, no, and no. Fantastic Granite Spacious State-of-the-Art ! Corian Charming Maple Great Neighborhood Gourmet

Here’s the Breakdown: FIVE TERMS CORRELATED TO A HIGHER SALE PRICE Granite State-of-the-Art Corian Maple Gourmet FIVE TERMS CORRELATED TO A LOWER SALE PRICE Fantastic Spacious ! Charming Great Neighborhood

In which the facts of crime are sorted out from the fictions. What Nicolae Ceaus¸escu learned—the hard way—about abortion. . . Why the 1960 s was a great time to be a criminal. . . Think the roaring 1990 s economy put a crimp on crime? Think again. . . Why capital punishment doesn’t deter criminals. . . Do police actually lower crime rates? . . . Prisons, prisons everywhere. . . Seeing through the New York City police “miracle”. . . What is a gun, really? . . . Why early crack dealers were like Microsoft millionaires and later crack dealers were like Pets. com. . . The superpredator versus the senior citizen. . . Jane Roe, crime stopper: how the legalization of abortion changed everything. WHERE HAVE ALL THE CRIMINALS GONE?