Freakonomics

Steven D. Levitt, Stephen J. Dubner

• Publisher: William Morrow
• Year: 2011
• ISBN:
  9780062132345
• Topic: Economics
• Subtopic: Economic Theory
• Index: Economics

The legendary bestseller that made millions look at the world in a radically different way returns in a new edition, now including an exclusive discussion between the authors and bestselling professor of psychology Angela Duckworth.

Which is more dangerous, a gun or a swimming pool? Which should be feared more: snakes or french fries? Why do sumo wrestlers cheat? In this groundbreaking book, leading economist Steven Levitt—Professor of Economics at the University of Chicago and winner of the American Economic Association's John Bates Clark medal for the economist under 40 who has made the greatest contribution to the discipline—reveals that the answers. Joined by acclaimed author and podcast host Stephen J. Dubner, Levitt presents a brilliant—and brilliantly entertaining—account of how incentives of the most hidden sort drive behavior in ways that turn conventional wisdom on its head.

Chapter 1

WHAT DO SCHOOLTEACHERS AND SUMO WRESTLERS HAVE IN COMMON?

Imagine for a moment that you are the manager of a day-care center. You have a clearly stated policy that children are supposed to be picked up by 4 p.m. But very often parents are late. The result: at day’s end, you have some anxious children and at least one teacher who must wait around for the parents to arrive. What to do?

A pair of economists who heard of this dilemma—it turned out to be a rather common one—offered a solution: fine the tardy parents. Why, after all, should the day-care center take care of these kids for free?

The economists decided to test their solution by conducting a study of ten day-care centers in Haifa, Israel. The study lasted twenty weeks, but the fine was not introduced immediately. 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 day-care center. In the fifth week, the fine was enacted. It was announced that any parent arriving more than ten minutes late would pay $3 per child for each incident. The fee would be added to the parents’ monthly bill, which was roughly $380.

After the fine was enacted, the number of late pickups promptly went…up. Before long there were twenty late pickups per week, more than double the original average. 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. Economists love incentives. They love to dream them up and enact them, study them and tinker with them. 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. His solution may not always be pretty—it may involve coercion or exorbitant penalties or the violation of civil liberties—but the original problem, rest assured, will be fixed. An incentive is a bullet, a lever, a key: an often tiny object with astonishing power to change a situation.

We all learn to respond to incentives, negative and positive, from the outset of life. If you toddle over to the hot stove and touch it, you burn a finger. But if you bring home straight A’s from school, you get a new bike. If you are spotted picking your nose in class, you get ridiculed. But if you make the basketball team, you move up the social ladder. If you break curfew, you get grounded. But if you ace your SATs, you get to go to a good college. If you flunk out of law school, you have to go to work at your father’s insurance company. But if you perform so well that a rival company comes calling, you become a vice president and no longer have to work for your father. If you become so excited about your new vice president job that you drive home at eighty mph, you get pulled over by the police and fined $100. But if you hit your sales projections and collect a year-end bonus, you not only aren’t worried about the $100 ticket but can also afford to buy that Viking range you’ve always wanted—and on which your toddler can now burn her own finger.

An incentive is simply a means of urging people to do more of a good thing and less of a bad thing. But most incentives don’t come about organically. Someone—an economist or a politician or a parent—has to invent them. Your three-year-old eats all her vegetables for a week? She wins a trip to the toy store. A big steelmaker belches too much smoke into the air? The company is fined for each metric ton of pollutants over the legal limit. Too many Americans aren’t paying their share of income tax? It was the economist Milton Friedman who helped come up with a solution to this one: automatic tax withholding from employees’ paychecks.

There are three basic flavors of incentive: economic, social, and moral. Very often a single incentive scheme will include all three varieties. 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.

Some of the most compelling incentives yet invented have been put in place to deter crime. Considering this fact, it might be worthwhile to take a familiar question—why is there so much crime in modern society?—and stand it on its head: why isn’t there a lot more crime?

After all, every one of us regularly passes up opportunities to maim, steal, and defraud. The chance of going to jail—thereby losing your job, your house, and your freedom, all of which are essentially economic penalties—is certainly a strong incentive. But when it comes to crime, people also respond to moral incentives (they don’t want to do something they consider wrong) and social incentives (they don’t want to be seen by others as doing something wrong). For certain types of misbehavior, social incentives are terribly powerful. In an echo of Hester Prynne’s scarlet letter, many American cities now fight prostitution with a “shaming” offensive, posting pictures of convicted johns (and prostitutes) on websites or on local-access television. Which is a more horrifying deterrent: a $500 fine for soliciting a prostitute or the thought of your friends and family ogling you on www.HookersAndJohns.com?

So through a complicated, haphazard, and constantly readjusted web of economic, social, and moral incentives, modern society does its best to militate against crime. Some people would argue that we don’t do a very good job. But taking the long view, that is clearly not true. Consider the historical trend in homicide (not including wars), which is both the most reliably measured crime and the best barometer of a society’s overall crime rate. These statistics, compiled by the criminologist Manuel Eisner, track the historical homicide levels in five European regions.

HOMICIDES

(PER 100,000 PEOPLE)

The steep decline of these numbers over the centuries suggests that, for one of the gravest human concerns—getting murdered—the incentives that we collectively cook up are working better and better.

So what was wrong with the incentive at the Israeli day-care centers?

You have probably already guessed that the $3 fine was simply too small. For that price, a parent with one child could afford to be late every day and only pay an extra $60 each month—just one-sixth of the base fee. As babysitting goes, that’s pretty cheap. What if the fine had been set at $100 instead of $3? That would have likely put an end to the late pickups, though it would have also engendered plenty of ill will. (Any incentive is inherently a trade-off; the trick is to balance the extremes.)

But 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). For just a few dollars each day, parents could buy off their guilt. Furthermore, the small size of the fine sent a signal to the parents that late pickups weren’t such a big problem. If the day-care center suffers only $3 worth of pain for each late pickup, why bother to cut short your tennis game? Indeed, when the economists eliminated the $3 fine in the seventeenth week of their study, the number of late-arriving parents didn’t change. Now they could arrive late, pay no fine, and feel no guilt.

Such is the strange and powerful nature of incentives. A slight tweak can produce drastic and often unforeseen results. Thomas Jefferson noted this while reflecting on the tiny incentive that led to the Boston Tea Party and, in turn, the American Revolution: “So inscrutable is the arrangement of causes and consequences in this world that a two-penny duty on tea, unjustly imposed in a sequestered part of it, changes the condition of all its inhabitants.”

In the 1970s, researchers conducted a study that, like the Israeli day-care study, pitted a moral incentive against an economic incentive. In this case, they wanted to learn about the motivation behind blood donations. Their discovery: when people are given a small stipend for donating blood rather than simply being praised for their altruism, they tend to donate less blood. The stipend turned a noble act of charity into a painful way to make a few dollars, and it wasn’t worth it.

What if the blood donors had been offered an incentive of $50, or $500, or $5,000? Surely the number of donors would have changed dramatically.

But something else would have changed dramatically as well, for every incentive has its dark side. If a pint of blood were suddenly worth $5,000, you can be sure that plenty of people would take note. They might literally steal blood at knifepoint. They might pass off pig blood as their own. They might circumvent donation limits by using fake IDs. Whatever the incentive, whatever the situation, dishonest people will try to gain an advantage by whatever means necessary.

Or, as W. C. Fields once said: a thing worth having is a thing worth cheating for.

Who cheats?

Well, just about anyone, if the stakes are right. You might say to yourself, I don’t cheat, regardless of the stakes. And then you might remember the time you cheated on, say, a board game. Last week. Or the golf ball you nudged out of its bad lie. Or the time you really wanted a bagel in the office break room but couldn’t come up with the dollar you were supposed to drop in the coffee can. And then took the bagel anyway. And told yourself you’d pay double the next time. And didn’t.

For every clever person who goes to the trouble of creating an incentive scheme, there is an army of people, clever and otherwise, who will inevitably spend even more time trying to beat it. Cheating may or may not be human nature, but it is certainly a prominent feature in just about every human endeavor. Cheating is a primordial economic act: getting more for less. So it isn’t just the boldface names—inside-trading CEOs and pill-popping ballplayers and perk-abusing politicians—who cheat. It is the waitress who pockets her tips instead of pooling them. It is the Wal-Mart payroll manager who goes into the computer and shaves his employees’ hours to make his own performance look better. It is the third grader who, worried about not making it to the fourth grade, copies test answers from the kid sitting next to him.

Some cheating leaves barely a shadow of evidence. In other cases, the evidence is massive. Consider what happened one spring evening at midnight in 1987: seven million American children suddenly disappeared. The worst kidnapping wave in history? Hardly. It was the night of April 15, and the Internal Revenue Service 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 incentive for those cheating taxpayers was quite clear. The same for the waitress, the payroll manager, and the third grader. But what about that third grader’s teacher? Might she have an incentive to cheat? And if so, how would she do it?

Imagine now that instead of running a day-care center in Haifa, you are running the Chicago Public Schools, a system that educates 400,000 students each year.

The most volatile current debate among American school administrators, teachers, parents, and students concerns “high-stakes” testing. The stakes are considered high because instead of simply testing students to measure their progress, schools are increasingly held accountable for the results.

The federal government mandated high-stakes testing as part of the No Child Left Behind law, signed by President Bush in 2002. But even before that law, most states gave annual standardized tests to students in elementary and secondary school. Twenty states rewarded individual schools for good test scores or dramatic improvement; thirty-two states sanctioned the schools that didn’t do well.

The Chicago Public School system embraced high-stakes testing in 1996. Under the new policy, a school with low reading scores would be placed on probation and face the threat of being shut down, its staff to be dismissed or reassigned. The CPS also did away with what is known as social promotion. In the past, only a dramatically inept or difficult student was held back a grade. Now, in order to be promoted, every student in third, sixth, and eighth grade had to manage a minimum score on the standardized, multiple-choice exam known as the Iowa Test of Basic Skills.

Advocates of high-stakes testing argue that it raises the standards of learning and gives students more incentive to study. Also, if the test prevents poor students from advancing without merit, they won’t clog up the higher grades and slow down good students. Opponents, meanwhile, worry that certain students will be unfairly penalized if they don’t happen to test well, and that teachers may concentrate on the test topics at the exclusion of more important lessons.

Schoolchildren, of course, have had incentive to cheat for as long as there have been tests. But high-stakes testing has so radically changed the incentives for teachers that they too now have added reason to cheat. 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. If her students do well enough, she might find herself praised, promoted, and even richer: the state of California at one point introduced bonuses of $25,000 for teachers who produced big test-score gains.

And if a teacher were to survey this newly incentivized landscape and consider somehow inflating her students’ scores, she just might be persuaded by one final incentive: teacher cheating is rarely looked for, hardly ever detected, and just about never punished.

How might a teacher go about cheating? There are any number of possibilities, from brazen to subtle. A fifth-grade student in Oakland recently came home from school and gaily told her mother that her super-nice teacher had written the answers to the state exam right there on the chalkboard. Such instances are certainly rare, for placing your fate in the hands of thirty prepubescent witnesses doesn’t seem like a risk that even the worst teacher would take. (The Oakland teacher was duly fired.) There are more nuanced ways to inflate students’ scores. A teacher can simply give students extra time to complete the test. If she obtains a copy of the exam early—that is, illegitimately—she can prepare them for specific questions. More broadly, she can “teach to the test,” basing her lesson plans on questions from past years’ exams, which isn’t considered cheating but may well violate the spirit of the test. Since these tests all have multiple-choice answers, with no penalty for wrong guesses, a teacher might instruct her students to randomly fill in every blank as the clock is winding down, perhaps inserting a long string of Bs or an alternating pattern of Bs and Cs. She might even fill in the blanks for them after they’ve left the room.

But if a teacher really wanted to cheat—and make it worth her while—she might collect her students’ answer sheets and, in the hour or so before turning them in to be read by an electronic scanner, erase the wrong answers and fill in correct ones. (And you always thought that no. 2 pencil was for the children to change their answers.) If this kind of teacher cheating is truly going on, how might it be detected?

To catch a cheater, it helps to think like one. If you were willing ...