Author Steven Levitt, working with journalist Stephen Dubner, shows how economic theories can be used to analyze social issues. Each of the six essays in Freakonomics explores a different theory or social issue, from cheating by sumo wrestlers to the economic organization of drug gangs. Along the way it addresses a series of questions such as "Why do some teachers cheat on test results?" and "Do parents really make a difference to a child's success in life?" Using a series of stories and case studies the author shows that, at its root, economics is the study of how people behave and how they get what they want.
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Humans often make decisions based on incentives, which are "a means of urging people to do more of a good thing or less of a bad thing." The author describes three kinds of incentives:
He concludes that many schemes combine different types of incentive to influence behavior. The author looks at examples of cheating to understand how incentives work.
In Chicago's public schools the results from annual standardized tests determine teacher pay and promotions, as well as the outlook for the whole school. Teachers have an obvious economic incentive to cheat on the test results, and in some years as many as five percent of them do so.
In the world of sumo wrestling, an individual wrestler's ranking determines every aspect of his life. Rankings are determined by the number of wins at bimonthly tournaments. Studies have found that, in a 15-round tournament, an unusually high number of wrestlers with a 7-7 record go on to win in their final bout, enabling them to advance. The author theorizes that economic incentives could be involved, as higher-ranked wrestlers are bribed to throw a fight in favor of a competitor who would otherwise not advance. However, in the tight-knit sumo community, where the stakes for winning or losing are high, there are also strong moral and social incentives for the higher-ranked wrestlers to assist those at risk of falling back in the rankings.
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A situation where one person or group has more information than another is a case of information asymmetry. The book explores this concept by looking at the Ku Klux Klan and at modern real estate agents. For over a century the KKK had been a powerful proponent of racist ideology. The group used information asymmetry such as passwords and secret handshakes to maintain an image of mystery and fear. In the 1940s a journalist called Stetson Kennedy infiltrated the group and revealed its secrets on a popular radio program. This helped to turn mystery into ridicule and KKK membership dropped dramatically.
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Real estate agents profit from information asymmetry. They know a great deal about the housing market and also use code words to communicate with each other. They may hint that there is a problem in the market, to get owners to sell faster; or, they may use coded language in a listing to pass along information to other agents.
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The author examines the history of the crack epidemic in the United States using the example of one gang, the Black Gangster Disciple Nation, explaining its hierarchy and how profits are distributed. Contrary to popular belief, not everyone gets rich from selling drugs. Rather, the gangs are a lot like corporations such as McDonald's, with a strict hierarchy and close control of the distribution of profits. The top boss, a dealer named J.T., made over $100,000 a year. His 'employees,' the foot soldiers who risked their lives selling on the streets, made very little. However, the foot soldiers were willing to take this risk in the hope that they, too, might one day become rich and powerful. Levitt calls this a "winner-take-all" labor market.
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The author looks at eight hypotheses that might explain the marked drop in crime in America in the 1990s, such as new policing strategies, new gun-control laws, and the role of capital punishment. However, none of these hypotheses can be proven with the data. Instead, the author concludes that the primary reasons for the drop in crime were an increased incarceration rate, more police officers, and the legalization of abortion.
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After the 1973 Roe v. Wade case that legalized abortion in the United States, many women in poor communities terminated pregnancies that would otherwise have been unwanted children born into a life of poverty. Unwanted children have a high probability of becoming adult criminals. The impact of Roe v. Wade on crime statistics shows up in the mid-1990s, when such children would have been entering their twenties.
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Is nature or nurture more important to a child's development? The author analyzes 16 different factors that could play a role, using data on over 20,000 students from the Early Child Longitudinal Study. He concludes that the most important factors are the parents' socioeconomic status, education level, and the age at which they had the child. These are immutable or fixed factors that cannot be changed by behaviors such as reading to the child every night or programs such as Head Start.
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Does the name given to a child impact its long term prospects? The author looks at how a racially distinct name may alter a child's success. In one study, a hypothetical candidate with the stereotypically black name DeShawn Williams was much less likely to get a job interview than someone called Jake Williams, even when their resumes were otherwise identical. This study suggests that choosing apparently white names over black ones reinforces stereotypes and perpetuates the black-white achievement gap.
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Freakonomics shows how incentives, information asymmetry, and other economic theories impact culture in ways beyond economics, including why people cheat and why names are important. However, at the end of the book, the author points out that statistical data does not always explain how people behave. He describes two children: the first grew up with an abusive father in a poor black community; the second grew up in a loving upper-class white community. Contrary to expectations based on the data, it was the first child who grew up to be very successful, becoming renowned Harvard economist Roland Fryer. The second child grew up to be Ted Kaczynski, the "Unabomber."
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