Monday, March 07, 2011

Freakonomics by Steven D. Levitt and Stephen J. Dubner

Freakonomics is a book about making sense of a large volume of data using interesting questions. It is simply thinking sensibly about how people behave in the real world and as the author says, all it requires is a novel way of looking, of discerning, of measuring. This isn’t necessarily a difficult task, nor does it require super sophisticated thinking. The book has essentially tried to figure out what the typical gang member or sumo wrestler figured out on his own (although it had to be done in reverse).

The effect of reading this book is this: You might become more skeptical of the conventional wisdom; you may begin looking for hints as to how things aren’t quite what they seem; perhaps you will seek out some trove of data and sift through it, balancing your intelligence and your intuition to arrive at a glimmering new idea. Some of these ideas might make you uncomfortable, even unpopular, just like the claim that legalized abortions resulted in massive drop in crime.

Is your real estate agent working for your best interest?

All experts - doctors, lawyers, contractors, stockbrokers, auto mechanics, mortgage brokers, financial planners, all enjoy a gigantic informational advantage. And they use that information to help their customers get exactly what they want for the best price. Right? But experts are human, and humans respond to incentives. How any given expert treats a customer, therefore, will depend on how that expert’s incentives are set up.

The author explains this with the help of a wonderful question: what is the real-estate agent’s incentive when she is selling her own home? Simple: to make the best deal possible, same as your incentive when you are selling your home. And so your incentive and the real-estate agent’s incentive would seem to be nicely aligned. Her commission, after all, is based on the sale price.

Usually, only 1.5% of the 6% commission of the purchase price goes directly into your agent’s pocket. So on the sale of your $300,000 house, her personal take of the commission is $4,500. But what if the house could be sold for $310,000 with a few more newspaper ads and a little more patience? After the commission, that puts an additional $9,400 in your pocket, but the agent’s personal share - 1.5 percent of the extra $10,000 - is a mere $150. If you earn $9,400 while she earns only $150, maybe your incentives aren’t aligned after all, especially when she’s the one paying for the ads and doing all the work. Is the agent willing to put out all that extra time, money, and energy for just $150?

How to get more clicks in online dating sites?

The author observes that of the many ways to fail on a dating website, not posting a photo of yourself is perhaps the most certain. A man who does not include his photo gets only 1/4th the volume of e-mail response of a man who does; a woman who doesn’t include her photo gets only 1/6th the response. A low-income, poorly educated, unhappily employed, not-very-attractive, slightly overweight, and balding man who posts his photo stands a better chance of gleaning some e-mails than a man who says he makes $200,000 and is deadly handsome but doesn’t post a photo. As in the case of a brand-new car with a for-sale sign without a photo, prospective customers will assume he’s got something seriously wrong under the hood.

Men who say they want a long-term relationship do much better than men looking for an occasional lover. But women looking for an occasional lover do great. 

For men, a woman’s looks are of paramount importance. For women, a man’s income is terribly important. 

The richer a man is the more e-mails he receives. But a woman’s income appeal is a bell-shaped curve: men do not want to date low-earning women, but once a woman starts earning too much, they seem to be scared off.

Men want to date students, artists, musicians, veterinarians, and celebrities (while avoiding secretaries, retirees, and women in the military and law enforcement). Women do want to date military men, policemen, and firemen (possibly the result of a 9/11 Effect, like the higher payments to Paul Feldman’s bagel business), along with lawyers and financial executives. Women avoid laborers, actors, students, and men who work in food services or hospitality. 

For men, being short is a big disadvantage (which is probably why so many lie about it), but weight doesn’t much matter. For women, being overweight is deadly (which is probably why they lie).

For a man, having red hair or curly hair is a downer, as is baldness—but a shaved head is okay. For a woman, salt-and-pepper hair is bad, while blond hair is very good. 

In the world of online dating, a headful of blond hair on a woman is worth about the same as having a college degree—and, with a $100 dye job versus a $100,000 tuition bill, an awful lot cheaper.

Why do prostitutes earn more than architects?

As the supply-demand theory says when there are a lot of people willing and able to do a job, that job generally doesn’t pay well. Other factors that determine the wage are the specialized skills a job requires, the unpleasantness of a job, and the demand for services. The delicate balance between these factors can explain why the typical prostitute earns more than the typical architect although it may not seem as though she should.

The architect would appear more skilled and better educated (as the words are usually defined). But the girls don’t grow up dreaming of becoming prostitutes, making the supply of potential prostitutes relatively small. Their skills, while not necessarily “specialized,” are practices in a very specialized context. And their job is unpleasant and forbidding in at least two ways: the likelihood of violence and the lost opportunity of having a family life. And as for the demand, an architect is more likely to hire a prostitute than vice versa, let’s just say.

Bottom line: An incredibly rich set of data—which, if the right questions are asked of it, tells some surprising stories.

Levitt, the genius: The author proves that many sumo wrestlers are corrupt using a mountain of data from the real match scores. Officials from the Japanese Sumo Association typically dismissed any such charges as fabrications by disgruntled former wrestlers until , proving the ingenuity of the author.

Quotes garden: 
  • If morality represents how people would like the world to work, then economics shows how it actually does work.
  • Knowing what to measure and how to measure it makes a complicated world much less so.
  • 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.
  • Information is a beacon, a cudgel, an olive branch, a deterrent, depending on who wields it and how.
  • Chemistry is best left to chemists.
  • Gun advocates believe that gun laws are too strict; opponents believe exactly the opposite. How can intelligent people view the world so differently? Because a gun raises a complex set of issues that change according to one factor: whose hand happens to be holding the gun.
  • In a world that is increasingly impatient with long-term processes, fear is a potent short-term play.

4 comments:

  1. Nice..!

    Reply
  2. superb review! :)

    Reply
  3. Thank you! :)

    Reply