Freakonomics
Understanding the Hidden Side of Everything
Overview
Themes and
Fundamental Ideas
• Positive vs. Normative Analysis/Economics
• Positive:
• Positive economics is the branch of economics that deals
with the description and explanation of economic
phenomena
• It focuses on facts and cause-and-effect relationships and
includes the development and testing of economic theories.
Themes and
Fundamental Ideas
• Normative:
• Normative economics is the branch of economics that
incorporates value judgements about what the economy
ought to be like or what particular policy actions ought to be
recommended.
• Essentially, Positive Economics attempts to explain why the
economy works the way it does and Normative Economics
attempts to find the best ways to control and change the
economy to meet our goals.
Normative Analysis
Themes and
Fundamental Ideas
• The Nature of Scientific Inquiry
• Freakonomics provides concrete illustrations of how
unconventional methods of data gathering and “stand-onyour-head” ways of looking at data are often necessary to
make sense of the world.
• Knowing what to measure and how to measure it makes a
complicated world less so.
Themes and
Fundamental Ideas
• Incentives are the Cornerstone of Modern Life:
• Economics is the study of human behavior as it manifests
itself in the sometimes foggy mist of incentives.
• Understanding incentives is the key to clearly
understanding any human behavior.
Incentives Matter
Themes and
Fundamental Ideas
• The conventional wisdom is often wrong
• The conventional wisdom that is used as an explanation
for many social issues is unexamined, unquestioned and
often not correct.
• Q: Can you give some examples?
Themes and
Fundamental Ideas
• Dramatic effects often have distant, even subtle causes.
• “the answer to a given riddle is not always right in front
of you”
• Positive economic inquiry and gathering and interpreting
the data that are necessary to solve a sticky social riddle is
often hard (and often the only way to find the underlying
cause).
Chapter 1 Pre-Reading
Notes
What do School Teachers and Sumo Wrestlers Have in Common?
VS
Key Terms:
• Incentive:
• “a means of urging people to do more of a good thing or
less of a bad thing”
• Types of incentives:
• Economic Incentives:
• -those incentives which a person responds to in the market place.
• Social Incentives:
• motivate people to respond in a certain way because they care
(or are worried) about how they will be viewed by others (think
“Scarlet Letter”).
Key Terms
• Moral Incentives:
• Appeal to a person’s sense of right versus wrong.
• Utility:
• A measure of the relative satisfaction from or desirability of
consumption of various goods and services.
• Marginal Utility:
• The change in total satisfaction derived from acquiring one
additional unit of a specific product or service.
• Quid Pro Quo:
• Latin- a favor or advantage granted or expected in return for
something. ‘something for something’
Chapter 1 PostReading Notes
What do School Teachers and Sumo Wrestlers Have in Common?
Basic Economic
Concepts
• Incentives Matter:
• Incentives and how people respond to them is a recurring
theme.
• “economists love incentives....The typical economist believes the
world has not yet invented a problem that he cannot fix if given
a free hand to design the proper incentive scheme.”
• Given the proper incentives we see that most people can be
induced to do things which are generally against their nature.
Chapter 2 PreReading Notes
How is the Ku Klux Klan Like a Group of Real Estate Agents
Basic Economic
Concepts
• Incentives Matter:
• Incentives and how people respond to them is a recurring
theme.
• “economists love incentives....The typical economist believes the
world has not yet invented a problem that he cannot fix if given
a free hand to design the proper incentive scheme.”
• Given the proper incentives we see that most people can be
induced to do things which are generally against their nature.
• Information is Power: this chapter is all about
information and the advantages it grants to those who
have it vs. the disadvantages it imposes on those who
do not.
• Information Asymmetries: This is when one person or
group has more information than another.
• The Economic Value of Information: When you have
a buyer and a seller, it is rare for both parties to have
“perfect information”. A car loses the largest amount
of its value the moment it is driven off the lot, not
because it is suddenly 35% less of a car, but because
the buyer can no longer be certain of how the car has
been treated.
• The buyer will pay extra for a car that has not been driven
off the lot for the added knowledge that it has been taken
care of.
• Technological Change: Over time technological change
has had a huge impact on how the goods we consume
are produced.
• While tech change takes different forms, one thing that
almost all forms have in common is their effect on costs
• i.e. cost tends to go down (take computers for example)
• -while the power of computers has steadily gone up, their price
has steadily gone down.
• This chapter applies this concept of technological change
to the market for information. With the creation of the
internet, the cost of both providing and acquiring
information has fallen dramatically.
• This has had the effect of “leveling the playing field”
between consumers and providers of services.
• Consider the travel service, it used to be that consumers had
little knowledge or ability to get knowledge about booking
prices or availability. They had to, therefore, go through
travel agencies (specialists who knew how to navigate this
specialized field of information).
• With the internet, travel prices have dropped and consumer
access has increased.
• Competition and Efficiency: According to the model
of supply and demand, market equilibrium ensure that
the net benefits from production and consumption of
any good are as large as possible.
• As a result, the outcome is efficient
• In order to have an efficient market, however, both buyer
and seller must have perfect knowledge
• Thus the information asymmetries in markets such as realestate, ensure that the outcome will not be efficient (or fair).
• In contrast, the increased information available to consumers
via the internet for things such as life-insurance policies, has
made the insurance market more efficient and therefore the
outcomes in that market are more fair.
Chapter 2 PostReading Notes
How is the Ku Klux Klan Like a Group of Real Estate Agents
Chapter Summary
• The KLAN• Over time the KKK was able to exert considerable
influence over the lives of those they considered
“enemies,” e.g. African Americans, Jews, Catholics
• When the Klan’s secret handshakes, meetings etc. were
disclosed, it took away much of the Klan’s power.
• Once the secrets were out, much of their membership
were no longer willing to participate for fear of being
exposed to the public.
• Individuals can exploit informational advantages
• Real estate agents have a much better sense of the market
than buyers or sellers. This amounts to an info advantage.
• They can combine this with the buyer or seller’s fear that
they won’t find a house in order to get the best deal for
themselves.
• The same can be said of funeral directors, car salesmen, or
mechanics.