$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?
There’s one way to find out: measure the difference between the sales data for houses
that belong to real-estate agents themselves and the houses they sold on behalf of clients.
Using the data from the sales of those 100,000 Chicago homes, and controlling for any
number of variables—location, age and quality of the house, aesthetics, and so on—it
turns out that a real-estate agent keeps her own home on the market an average of ten
days longer and sells it for an extra 3-plus percent, or $10,000 on a $300,000 house.
When she sells her own house, an agent holds out for the best offer; when she sells yours,
she pushes you to take the first decent offer that comes along. Like a stockbroker
churning commissions, she wants to make deals and make them fast. Why not? Her share
of a better offer—$150—is too puny an incentive to encourage her to do otherwise.
Of all the truisms about politics, one is held to be truer than the rest: money buys
elections. Arnold Schwarzenegger, Michael Bloomberg, Jon Corzine—these are but a
few recent, dramatic examples of the truism at work. (Disregard for a moment the
contrary examples of Howard Dean, Steve Forbes, Michael Huffington, and especially
Thomas Golisano, who over the course of three gubernatorial elections in New York
spent $93 million of his own money and won 4 percent, 8 percent, and 14 percent,
respectively, of the vote.) Most people would agree that money has an undue influence on
elections and that far too much money is spent on political campaigns.
Indeed, election data show it is true that the candidate who spends more money in a
campaign usually wins. But is money the cause of the victory?
It might seem logical to think so, much as it might have seemed logical that a booming
1990s economy helped reduce crime. But just because two things are correlated does not
mean that one causes the other. A correlation simply means that a relationship exists
between two factors—let’s call them X and Y—but it tells you nothing about the
direction of that relationship. It’s possible that X causes Y; it’s also possible that Y
causes X; and it may be that X and Y are both being caused by some other factor, Z.
Think about this correlation: cities with a lot of murders also tend to have a lot of police
officers. Consider now the police/murder correlation in a pair of real cities. Denver and
Washington, D.C., have about the same population—but Washington has nearly three
times as many police as Denver, and it also has eight times the number of murders.
Unless you have more information, however, it’s hard to say what’s causing what.
Someone who didn’t know better might contemplate these figures and conclude that it is
all those extra police in Washington who are causing the extra murders. Such wayward
thinking, which has a long history, generally provokes a wayward response. Consider the
folktale of the czar who learned that the most disease-ridden province in his empire was
also the province with the most doctors. His solution? He promptly ordered all the
doctors shot dead.
Now, returning to the issue of campaign spending: in order to figure out the relationship
between money and elections, it helps to consider the incentives at play in campaign
finance. Let’s say you are the kind of person who might contribute $1,000 to a candidate.
Chances are you’ll give the money in one of two situations: a close race, in which you
think the money will influence the outcome; or a campaign in which one candidate is a
sure winner and you would like to bask in reflected glory or receive some future in-kind
consideration. The one candidate you won’t contribute to is a sure loser. (Just ask any
presidential hopeful who bombs in Iowa and New Hampshire.) So front-runners and
incumbents raise a lot more money than long shots. And what about spending that
money? Incumbents and front-runners obviously have more cash, but they only spend a
lot of it when they stand a legitimate chance of losing; otherwise, why dip into a war
chest that might be more useful later on, when a more formidable opponent appears?
Now picture two candidates, one intrinsically appealing and the other not so. The
appealing candidate raises much more money and wins easily. But was it the money that
won him the votes, or was it his appeal that won the votes and the money?
That’s a crucial question but a very hard one to answer. Voter appeal, after all, isn’t easy
to quantify. How can it be measured?
It can’t, really—except in one special case. The key is to measure a candidate
against…himself. That is, Candidate A today is likely to be similar to Candidate A two or
four years hence. The same could be said for Candidate B. If only Candidate A ran
against Candidate B in two consecutive elections but in each case spent different amounts
of money. Then, with the candidates’ appeal more or less constant, we could measure the
As it turns out, the same two candidates run against each other in consecutive elections
all the time—indeed, in nearly a thousand U.S. congressional races since 1972. What do
the numbers have to say about such cases?
Here’s the surprise: the amount of money spent by the candidates hardly matters at all. A
winning candidate can cut his spending in half and lose only 1 percent of the vote.
Meanwhile, a losing candidate who doubles his spending can expect to shift the vote in
his favor by only that same 1 percent. What really matters for a political candidate is not
how much you spend; what matters is who you are. (The same could be said—and will be
said, in chapter 5—about parents.) Some politicians are inherently attractive to voters and
others simply aren’t, and no amount of money can do much about it. (Messrs. Dean,
Forbes, Huffington, and Golisano already know this, of course.)
And what about the other half of the election truism—that the amount of money spent on
campaign finance is obscenely huge? In a typical election period that includes campaigns
for the presidency, the Senate, and the House of Representatives, about $1 billion is spent
per year—which sounds like a lot of money, unless you care to measure it against
something seemingly less important than democratic elections.
It is the same amount, for instance, that Americans spend every year on chewing gum.
This isn’t a book about the cost of chewing gum versus campaign spending per se, or
about disingenuous real-estate agents, or the impact of legalized abortion on crime. It will
certainly address these scenarios and dozens more, from the art of parenting to the
mechanics of cheating, from the inner workings of the Ku Klux Klan to racial
discrimination on The Weakest Link. What this book is about is stripping a layer or two
from the surface of modern life and seeing what is happening underneath. We will ask a
lot of questions, some frivolous and some about life-and-death issues. The answers may
often seem odd but, after the fact, also rather obvious. We will seek out these answers in
the data—whether those data come in the form of schoolchildren’s test scores or New
York City’s crime statistics or a crack dealer’s financial records. (Often we will take
advantage of patterns in the data that were incidentally left behind, like an airplane’s
sharp contrail in a high sky.) It is well and good to opine or theorize about a subject, as
humankind is wont to do, but when moral posturing is replaced by an honest assessment
of the data, the result is often a new, surprising insight.
Morality, it could be argued, represents the way that people would like the world to
work—whereas economics represents how it actually does work. Economics is above all
a science of measurement. It comprises an extraordinarily powerful and flexible set of
tools that can reliably assess a thicket of information to determine the effect of any one
factor, or even the whole effect. That’s what “the economy” is, after all: a thicket of
information about jobs and real estate and banking and investment. But the tools of
economics can be just as easily applied to subjects that are more—well, more interesting.
This book, then, has been written from a very specific worldview, based on a few
Incentives are the cornerstone of modern life. And understanding them—or, often,
ferreting them out—is the key to solving just about any riddle, from violent crime to
sports cheating to online dating.
The conventional wisdom is often wrong. Crime didn’t keep soaring in the 1990s, money
alone doesn’t win elections, and—surprise—drinking eight glasses of water a day has
never actually been shown to do a thing for your health. Conventional wisdom is often
shoddily formed and devilishly difficult to see through, but it can be done.
Dramatic effects often have distant, even subtle, causes. The answer to a given riddle is
not always right in front of you. Norma McCorvey had a far greater impact on crime than
did the combined forces of gun control, a strong economy, and innovative police
strategies. So did, as we shall see, a man named Oscar Danilo Blandon, aka the Johnny
Appleseed of Crack.
“Experts”—from criminologists to real-estate agents—use their informational advantage
to serve their own agenda. However, they can be beat at their own game. And in the face
of the Internet, their informational advantage is shrinking every day—as evidenced by,
among other things, the falling price of coffins and life-insurance premiums.
Knowing what to measure and how to measure it makes a complicated world much less
so. If you learn how to look at data in the right way, you can explain riddles that
otherwise might have seemed impossible. Because there is nothing like the sheer power
of numbers to scrub away layers of confusion and contradiction.
So the aim of this book is to explore the hidden side of…everything. This may
occasionally be a frustrating exercise. It may sometimes feel as if we are peering at the
world through a straw or even staring into a funhouse mirror; but the idea is to look at
many different scenarios and examine them in a way they have rarely been examined. In
some regards, this is a strange concept for a book. Most books put forth a single theme,
crisply expressed in a sentence or two, and then tell the entire story of that theme: the
history of salt; the fragility of democracy; the use and misuse of punctuation. This book
boasts no such unifying theme. We did consider, for about six minutes, writing a book
that would revolve around a single theme—the theory and practice of applied
microeconomics, anyone?—but opted instead for a sort of treasure-hunt approach. Yes,
this approach employs the best analytical tools that economics can offer, but it also
allows us to follow whatever freakish curiosities may occur to us. Thus our invented field
of study: Freakonomics. The sort of stories told in this book are not often covered in
Econ. 101, but that may change. Since the science of economics is primarily a set of
tools, as opposed to a subject matter, then no subject, however offbeat, need be beyond
It is worth remembering that Adam Smith, the founder of classical economics, was first
and foremost a philosopher. He strove to be a moralist and, in doing so, became an
economist. When he published The Theory of Moral Sentiments in 1759, modern
capitalism was just getting under way. Smith was entranced by the sweeping changes
wrought by this new force, but it wasn’t only the numbers that interested him. It was the
human effect, the fact that economic forces were vastly changing the way a person
thought and behaved in a given situation. What might lead one person to cheat or steal
while another didn’t? How would one person’s seemingly innocuous choice, good or bad,
affect a great number of people down the line? In Smith’s era, cause and effect had begun
to wildly accelerate; incentives were magnified tenfold. The gravity and shock of these
changes were as overwhelming to the citizens of his time as the gravity and shock of
modern life seem to us today.
Smith’s true subject was the friction between individual desire and societal norms. The
economic historian Robert Heilbroner, writing in The Worldly Philosophers, wondered
how Smith was able to separate the doings of man, a creature of self-interest, from the
greater moral plane in which man operated. “Smith held that the answer lay in our ability
to put ourselves in the position of a third person, an impartial observer,” Heilbroner
wrote, “and in this way to form a notion of the objective…merits of a case.”
Consider yourself, then, in the company of a third person—or, if you will, a pair of third
people—eager to explore the objective merits of interesting cases. These explorations
generally begin with the asking of a simple unasked question. Such as: what do
schoolteachers and sumo wrestlers have in common?
“I’d like to put together a set of tools that let us catch terrorists,” Levitt said. “I don’t
necessarily know yet how I’d go about it. But given the right data, I have little doubt that
I could figure out the answer.”
It might seem absurd for an economist to dream of catching terrorists. Just as it must have
seemed absurd if you were a Chicago schoolteacher, called into an office and told that,
ahem, the algorithms designed by that skinny man with thick glasses had determined that
you are a cheater. And that you are being fired. Steven Levitt may not fully believe in
himself, but he does believe in this: teachers and criminals and real-estate agents may lie,
and politicians, and even CIA analysts. But numbers don’t.
—THENEWYORKTIMESMAGAZINE, AUGUST 3, 2003
What Do Schoolteachers and Sumo Wrestlers Have
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
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 cubic foot 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
C# Image: Save or Print Document and Image in Web Viewer
If there's no printer connected or your web browser doesn't support document or image printing, you can only preview it on web viewer in PDF or TIFF format. best pdf to html converter online; how to convert pdf into html code
there so much crime in modern society?—and stand it on its head: why isn’t there a lot
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.
(per 100,000 People)
15th c. n.a.
16th c. 7.0
17th c. 5.0
18th c. 1.5
19th c. 1.7
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 the 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
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.
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 each dependent child, tax filers were now required to provide a
Social Security number for each child. 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 the
brazen to the sophisticated. 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
Documents you may be interested
Documents you may be interested