17 January 2017

Freakonomics -- the review

I’ve heard of this book for years, but never bothered to read it because I was already an economist and didn’t think I needed to read a popular summary of Steven Levitt’s work.[1] My impression was that the book summarized his work in a popular (non-academic) style that helped people understand what economists do. I though that the book was useful in this respect in helping people understand what I do. Indeed, the most common reaction I get from people when telling them that I am an economist is that they have read Freakonomics, which implies that they have at least seen some work similar to what I do at aguanomics.[2]

It turns out that I was mistaken in my initial beliefs.

I just read this 2004 book 2006 revision, and it's made me think a bit more about how we (economists) communicate with the general public, and I think that some ways are better than others. First, there are textbooks, which describe the tools that economists use to put their theories into practice. Many many people have told me “I didn’t learn anything in economics. All I remember was a lot of math and curves.” This depressing outcome results from lecturers who merely reproduce problems and equations on the blackboard, without helping students understand either why those theories are used or how they came to be so popular with economists.[3] Second are books like Freakonomics that reproduce academic papers in a popular form. These books — like Economic Gangsters — give the public a limited vision of research without explaining the struggles of getting the right data or explaining the limitations of theories that are used (or not) in the final paper. Third, there are books that explain how economists think or how their thinking has evolved as they have tried to understand and summarize the people’s behaviour. These books, in my opinion, are the most interesting — and challenging — because they push people to revisit their assumptions and perspectives.[4] These are the books that I would recommend to people looking to “think like an economist” or, to be blunt, to think more accurately about how they and those around them actually behave. Finally, there are books like mine [pdf] that try to explain how to improve failing policies using basic economic insights and incentives.

Freakonomics is therefore NOT the book that I would recommend to anyone interested in (a) learning about how economists think, (b) understanding the world or (c) how to improve the world we live in.

This book with a memorable, but useless name provides readers with just-so stories that are good for  cocktail conversations but not for understanding economics.[5]

For example,
  • Legalized abortion explains the drop in crime in the US. Not only do Steve and Steve back off from the main claim in the original paper (they add other factors), but this theory has been falsified by others (see this and this). What struck me is their ongoing attempts to hold onto at least some elements in the original claim in later blog posts in what I’d call a “my lady doth protest too much” manner.
  • Real estate agents serve themselves better than they serve clients when selling their own homes. As a former real estate agent, I had to agree with their basic premise, but I thought their explanation too simplistic.[6] The most obvious problem is that agents have an entirely different understanding of themselves as sellers as well as of the markets. Surely, that different information (and the resulting “patience” that gets them a higher price as sellers) matters?
Looking over their other chapters (on cheating sumo wrestlers, drug dealers who live with their moms, the KKK as a multilevel marketing organization, etc.), I agree that the chapters are interesting and thoughtful, but I don’t see them as providing “lessons on the hidden side of everything.” Instead, I see them as a series of interesting magazine articles whose quirky “insights” might contribute to your next cocktail conversation.

The authors say that they want you to ask more questions and see the world differently, but what tools have they given to you in this book, in terms of a framework for seeing different and asking probing questions?[7] I didn’t detect any reliable technique (except perhaps to collect a neat dataset and call Steve Levitt), and that’s where I was disappointed. Freakonomics does not really reveal the hidden side of everything. Indeed, it’s more likely to mislead you into thinking you’ve learned something, when you’ve only learned an interesting angle on a complex topic on which you may lack either the experience or method to further explore.[8]

Take their example of the “underpaid” drug dealer who they say faces a higher risk of death than someone on Death Row in Texas (and thus must be overestimating the gains from their job). Does this statistical analysis mean that those street dealers are irrational? I don’t think so. As any economist would tell you, you need to look at their opportunity cost (i.e., the costs and benefits of their potential other choices). In this case, they are (a) NOT condemned to death, (b) not able to find other work with their experience and (c) not aware of their statistical mortality as much as their potential wealth. Those street runners are “taking their chances” in the same way as Americans are “living the dream,” i.e., in ignorance of reality.[9]

Bottom Line: I give this book THREE STARS. Dubner and Levitt present interesting puzzles worthy of cocktail conversation, but they overstate their contributions and accuracy (“numbers don’t lie” but theory can be incomplete or just wrong). I suggest that anyone interested in understanding how economics works and applying those lessons to “the hidden side of everything” read Economics in One Lesson by Henry Hazlitt. It’s free to download and provides a really useful perspective that anyone can apply to any topic they care about.[10]

  1. I’ve met Steven Levitt. He's a fine person and excellent economist, but this book is too “pop” in its oversimplification of his work and hagiographic treatment of his insights. Yes, he brings interesting statistical tools to“freaky” questions, but he’s not a “rogue economist exploring the hidden side of everything.” He’s just a guy with a dataset and empirical theory who finds some strong correlations. As I explain later on, he does not deliver the last word on pretty much any topic touched upon in this book. (It's interesting to see the two authors pooh-poohing people's objections to their claims in this revised edition. I get the impression that their answer is "bestseller, Bitch!" more than "hmmm..., maybe we claimed too much." See note 8.)
  2. I wrote two (good!) posts for the Freakonomics blog on the human right to water and oil and water.
  3. I published an article [pdf] on how students don’t really understand the “downward sloping demand curve” because its form is based on advanced techniques they won’t see for a few more classes -- meaning never for those who take one class or drop the major.
  4. Of those I have reviewed, I recommend Small is Beautiful, the Calculus of Consent, the Company of Strangers, Predictably Irrational, etc.
  5. "Freaky" anything sounds bad to me, and "freaky" economics -- unlike most economics -- isn't useful to most people. Even worse, there's nothing freaky to the stories in terms of the economics. I wish the authors had spent more time on the basic economics (making the book a useful learning experience) and less time defending empirical research that deserves to be ignored.
  6. I corresponded with Levitt’s co-author on my objections to their working paper back in 2005. The main one was that their analysis missed the most important point: it’s better to have an agent than not to have an agent — an obvious insight that saved me about €10,000 when I bought a flat in Amsterdam. Going further, would an agent work harder for you if their commission was a flat rate rather than a percentage of the sales price? They harp about commissions as detrimental to the client’s interest due to the small share of the additional profits an agent gains from working harder on your behalf — e.g., 3% of another $10,000 is only $300, but why would an agent work any harder, at all, if they were working on a flat rate commission? The main thing agents focus on, in my experience, is referrals to new clients, which is why many agents work hard "despite the weak incentives."
  7. My definition of an expert is “someone who knows what’s missing from your exposition or questions.” As an example of this, I give a fourth reason why it’s NOT irrational to vote (they give three weak reasons in the blog post included in their revised edition), i.e., the benefits to an individual from study and engagement in a topic.
  8. Here’s where I will brag that my years of experience traveling in 100+ countries gives me at least some respect for the diversity of rationales, beliefs and institutions that might explain potential outcomes.
  9. On page 134, they write “The typical parenting expert, like experts in other fields, is prone to sound exceedingly sure of himself. An expert doesn’t so much argue the various sides of an issue as plant his flag firmly on one side. That’s because an expert whose argument reeks of restraint or nuance often doesn’t get much attention.” I wonder if they ever applied the same critique to their own claims. (Indeed, they cite themselves in earlier chapters as evidence for their claims in later chapters — p139 on abortion and crime — as if their earlier points are not just claims but facts.) As another example, take Dubner on page 199, who writes “that paper [on police officer counts and crime] was later disputed… a gradate student found an obvious mathematical mistake in it — but Levitt’s ingenuity was obvious.” I’m not sure I’d say the same about someone whose claims rested on logic with “obvious mathematical mistakes”!
  10. Hazlitt says "the art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups," which he summarizes as "and then what?" That's a good question, and it's how I can easily predict that cheap water will lead to failing infrastructure or shortages, why climate change is arriving "too fast" (due to a lack of carbon taxes), and so on. I'd prefer people to ask "and then what?" more often and spend less time on sumo cheating.

14 January 2017

Should I stop flashbacks?

I'm not sure anyone wants to read old blog posts (even if they are good), because I don't know if people are even reading new ones.


Edit: I've restarted the feed ("tweet new posts") and will carry on with flashbacks. Thanks for all the feedback. It's helpful when I'm stuck in my echo chamber :)

12 January 2017

Why are we so bad at managing water?

That's the title of a talk I gave last Sept in Amsterdam. I just got the video.

(I also discuss how I created Life Plus 2 Meters as a project to help us manage water.)

Here are my slides and the talk as a 28 min MP3.