Freakeconomics

Freakonomics: A Rogue Economist Explores the Hidden Side of Everything by Steven Levitt and Stephen J. Dubner.

Lesson 1: Three kinds of incentives dominate your life.

• 1. economic 2. social 3 moral
• For example, the disincentive, or negative incentive, to commit a crime is that 1. you lose your job economically, lose your friends and reputation socially, and you will feel bad morally
• For example, I will give you $100. But you will have to share the $100 with someone else. However you share the amount does not matter as long as the other person agrees. From the economic point of view, the person should agree if you take $99 and that person takes only $1. But sometimes that person might not even help you unless you share the $100 equally.
• For example, people donate blood do not do it for economic compensation. Statistics showed that the people donated less when they were given a small amount of compensation because people only think of it as a moral thing to do. However, it might change once the compensation is high enough.
• Therefore, even the economy is the study of money, people often make decisions base on incentives other than their economic gains and losses.

Lesson 2: Experts are often incentivized to exploit the fact that they know more than you.

• For example, if you want to sell your house, you would call a real estate agent. The agent gets a commission base on the final price and should, therefore, try to maximize the selling price just as much as you. But that’s incorrect. it’s more beneficial for the agent to have you sell at $100,000 in 2 weeks than have you sell at $120,000 in 4 weeks.
• For example, if the government tries to get rid of the king cobra by giving money to those catch them, those “experts” would be breeding king cobra instead of catching them.
• For example, raising the minimum wage usually do not help the employees. The market would instead hire temporary workers.
• Information asymmetry incentivize us to cheat

Lesson 3: Just because two things happen simultaneously doesn’t mean that one causes the other.

Other application

• For example, the effect of 911 does not restrict in the event that it took place. Rather, it affects everyone by having a tighter security in the airport, having a stronger law enforcement agents at particular places and time, and causing more car accidents.
• For example, home court advantage has nothing to do with travel and jetlag and audience supports. It is directly related to the referee. Sports without referee do not have home court advantage.
• For example, in the 70s and 80s, crimes in the US was extremely high. People predicted it will continually increase to the 90s. But it started to fall off in the 90s. Some people argued that it was because the economy and living condition was better. It was actually because of the abortion was legalized in the 60s. Those weren’t meant to be born due to several reasons disappeared in abortion.
• An economist must abandon politics and ethics to focus on the reason behind the events.