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SuperFreakonomics - Book Review

1 January 2017
Dr. Moria Levy
book cover

"SuperFreakonomics: Breaking Life Down" is a book by Steven Levitt and Steven Savner, both esteemed figures in economics and journalism. Published in 2011, this book is a sequel to their previous work, "Freakonomics." The central concept of this book's title, 'Freak Economics,' was coined by the authors and revolves around decision-making influenced by incentives.

 

The authors substantiate the impact of incentives on decision-making through statistical analysis and a commitment to rigorous experimental protocols (a practice that needs to be consistently adhered to in some of the recognized results today). They begin with the premise that individuals respond to incentives, although only sometimes predictably or overtly.

 

Importantly, decision-making encompasses more than just financial and business realms; it covers all aspects of our lives. Presented in a collection of humorous anecdotes, this book explores a wide array of scenarios and decision-making analyses, ranging from unconventional subjects like prostitution (which is where the book starts) to a nation's behavior in the context of global warming.

 

"SuperFreakonomics" caters to a diverse audience eager to understand the factors shaping their choices. It provides an easily digestible yet informative read suitable for a broad readership.

 

The book delves into various topics, including infrastructure, economic terminology, experimental methodologies, diverse types of decision-making, consumer behavior, survival instincts, altruism, and the reliance on cost-effective and straightforward solutions.

 

While the book is filled with intriguing stories, the summary captures the fundamental ideas and revelations in its pages. While a summary is valuable, it is advisable not to rely solely on it but to fully engage with the entire book to grasp its rich content.

 

Infrastructure

Economic terminology

The book explores several crucial concepts that serve as the foundation for its discussions. While not all of these terms are explicitly restated in the summary, their essence forms the basis of both the summary and the entire book:

  1.  Economic Approach: This approach thoroughly examines decisions and the underlying motivations driving opinion shifts. It operates on the premise that these decisions arise from a complex interplay of values and preferences. This perspective distinguishes itself from the prevailing economic viewpoint, as it doesn't exclusively attribute human actions to selfishness and the pursuit of profit.

  2. Law of Unintended Consequences: This principle suggests that individuals respond to incentives, though not always predictably or overtly.

  3. Thinking in "Typical" Terms: This mode of thought relies on analyzing averages derived from statistical data. It's important to note that these averages describe "typical" behaviors, which serve as a foundational framework for understanding the world but don't encompass every detail.

  4. Price Discrimination: This practice involves charging varying fees for the same product.

  5. Perfect Substitutes: These goods can be easily exchanged for one another.

  6. Agent-Manager Problem: This concept pertains to situations where both parties involved in a task ostensibly share the same incentive. However, in practice, this may only sometimes be the case.

  7. Externalities: In this context, an individual bears the consequences of an action performed by someone else. Notably, in such cases, the person experiencing the externality lacks an incentive to alter their behavior since they are not the ones directly incurring the cost. For instance, consider the adverse effects of animal dung when used as a means of transportation in urban areas.

 

These terms collectively contribute to the framework of understanding presented in the book. While they may not all be explicitly mentioned in the summary, their influence permeates the book's content and the broader context.

 

 Experimental methodologies

Dos and Don'ts in Economic Experiments and Best Practices:

 

General Guidelines:

  • Ensure the randomness of data when conducting examinations, especially for different data segments that could potentially impact the observed phenomenon (see the issue of selection bias below).

  • Give preference to natural experiments, where individuals are observed in real-life situations without their awareness of being monitored, over laboratory experiments. Laboratory settings can introduce biases due to participants' knowledge of being watched. It's important to note that media coverage can similarly influence behavior for the same reason. People’s actions are context-dependent, and the context shapes their behavior.

  • While actions are relatively easy to observe, categorizing behaviors can be challenging. Keep this in mind :-)

  • When conducting natural experiments, exercise caution in cases where the number of variables is limited, and it's possible to isolate the variable under examination from other influences.

 

Do's and Don'ts:

  • Approach data from personal surveys with skepticism. There can be a significant gap between how people describe their behavior (stated preferences) and actual actions (revealed picks). Statistics indicating a phenomenon should not be the sole factor considered to explain the phenomenon. Always consider:

    a) Whether there is a more influential factor at play.

    b) Whether the observed figure results from a third factor that affects the phenomenon, with the data serving as a coincidental symptom.

    c) The presence of selection bias, such as whether specialized doctors accept more seriously ill patients, may affect patient outcomes more than their skill does.

 

Diverse types of decision-making

Consumer behavior

Insights:

Authorities often penalize suppliers rather than users, possibly because punishing individuals with less influence may seem unfair or because it provides a morally more straightforward solution. While these reasons are valid, the authors argue that in certain situations, such as in the realms of prostitution and drugs, penalizing the demand for services proves more effective than punishing the providers.

 

Price discrimination can occur under specific conditions:

  1. When customers exhibit distinct characteristics that indicate a willingness to pay more.

  2. When the seller has the means to prevent the resale of the product (to avoid the exploitation of price gaps).

 

Numerous factors influence product pricing, including:

  • The nature of the service or product.

  • Customer profiles.

  • The location or context of the sale.

  • The deal's timing, such as during periods of scarcity or holidays.

 

In cases where customers encounter products or services with perfect substitutes, prices tend to be identical.

 

A distinguishing characteristic of a market economy is its tendency to establish prices at a level where even the most challenging tasks become financially viable.

 

Sellers often find it advantageous to identify and capitalize on short-term job opportunities created by surges in demand during specific periods.

 

The Internet can eliminate the need for intermediaries when equivalent alternatives to the services offered by intermediaries are available.

 

Certain products and services exhibit price insensitivity, particularly regarding illegal activities.

 

Survival instincts

We all share a common desire to preserve our lives. However, a thought-provoking question emerges: Who possesses a stronger incentive to do so?

 

Initially, the authors extensively explore the issue of terrorism and the associated willingness to sacrifice one's life. Contrary to prevailing assumptions, low socioeconomic status or a lack of education does not reliably predict a willingness to embrace martyrdom. Moreover, research data, such as findings from Palestinian contexts, reveal that suicide bombers predominantly come from middle- or upper-class backgrounds, with many pursuing post-secondary education. While the precise motivations of these individuals remain undisclosed due to security classification, the authors emphasize that those facing hunger may have more immediate concerns. Current indicators suggest advancements in identifying potential candidates for terrorist activity compared to the past.

 

Transitioning to a topic more relevant to the majority of us—the incentives that promote longevity:

  • Pensions (Insurance): Individuals who invest in pension plans tend to live longer than those who do not.

  • Religious Belief, Especially Before Holidays (Linked to One's Faith): Faith can be a powerful motivator for extending one's life.

  • Regarding diseases and end-of-life care, the authors reveal that chemotherapy, among other treatments, provides limited benefits. So, why do these treatments continue to be recommended so frequently?

  • They offer some modest benefits, which can affect a physician's success.

  • Economic incentives play a role in physicians' recommendations.

  • Delivering the news that there is no viable treatment can be emotionally challenging.

  • While overall population statistics may not show improvement, there is evidence of significant advancements in young adults' health outcomes within specific subpopulations.

 

Altruism

Many of us are familiar with the startling events that unfolded in New York in 1964, where a three-stage stabbing incident was initially reported, accompanied by allegations that 38 citizens witnessed it without intervening. This occurrence became widely known as the "bystander phenomenon." However, recent revelations have cast doubt on this problematic and biased reporting. There were only two incidents, and they may not have been visible in the darkness. Interestingly, the police learned about the incident from a report by a civilian neighbor.

 

What insights can we gather regarding incentives for positive civic intervention or altruism in general?

  • The presence of numerous witnesses during a crisis decreases the likelihood of individual intervention, as Malcolm Gladwell highlights in "Turning Point." When we are alone, we feel a greater sense of responsibility.

  • The debate between selfishness, where individuals act solely based on self-interest (in line with classical economic theory), and altruism (a newer concept attempted by economists after laboratory experiments) is misplaced. Altruistic and selfish behaviors are not necessarily mutually exclusive; they can coexist within the same person in different contexts, such as within their family and business life. Furthermore, discerning whether seemingly altruistic behavior is genuinely selfless or influenced by personal gains can be challenging and context-dependent.

  • Most people's contributions often fall into categories like impure altruism (involving additional motives beyond altruism) or warm benevolence (providing a sense of satisfaction or alleviating discomfort when donating).

  • Ultimately, individuals are not easily categorized as "good" or "bad." They are individuals who respond to incentives. They can be influenced towards altruism or any other behavior if one knows "which buttons to push."

  • Companies may sometimes accept ideas that could be perceived as selfish, such as interest-bearing loans or even life insurance, while rejecting others, like organ trafficking. These decisions hinge on the nature of the idea, prevailing societal values, and the specific time in question.

 

Reliance on cost-effective and straightforward solutions

We often tend to avoid relying on inexpensive or overly simplistic solutions. When faced with complex problems, our instinct often leads us to believe that the answer must be equally intricate. However, the authors find it astonishing that cost-effective and straightforward solutions frequently resolve seemingly insurmountable issues, dispelling a sense of hopelessness. An example they present is the transition to using oil for energy, which proved to be a more affordable and straightforward alternative than the dwindling supply of whales, whose natural depletion made harvesting increasingly challenging.

 

Key insights related to decisions involving the adoption of cost-effective and uncomplicated solutions:

  • Convincing others of the merits of these solutions can be challenging precisely because they are low in cost or simplicity. When a solution implies fault or blame (e.g., doctors being asked to wash their hands), persuading individuals of its efficacy becomes even more difficult.

  • Encouraging suppliers to transition to these solutions can also be a formidable task, mainly when they rely on more expensive alternatives (e.g., child car seats versus conventional booster seats).

  • Similarly, influencing consumers to embrace these solutions can be challenging, both due to resistance to behavioral change and the presence of counter-incentives (e.g., concerns that using seat belts in a car may offend the driver's trust).

  • It's important to note that, in retrospect, these solutions may appear simple, but more is needed to maintain the substantial effort invested in developing them. Sometimes, the solution arises accidentally, while in many cases, it requires significant financial resources, time, and action (e.g., the development of the Salk vaccine to combat polio, a disease that posed a significant economic threat to the United States in the early 1950s).

 

In conclusion, we are inherently driven by incentives. While these motivations are not always immediately apparent, understanding them can powerfully illuminate our behavior, often challenging conventional wisdom in various circumstances.


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