Anyone exposed to the dogged philosophy of Freakonomics has probably been somewhat dazzled, or at least intrigued, by some of its revelations from ‘The Hidden Side of Everything’.
Since the best-selling, eponymous first book release just over ten years ago, to subsequent offshoots, via book, audio, and web site, it’s good to reflect on the basic tenets and perspective.
- INCENTIVES are ‘the cornerstones of modern life’. Understanding them or working them out is essential to solving life behaviour riddles. Originated by persons, incentives are the means to encourage people to do more of one activity and less of another. They imply trade-offs are in place, reducing extremes, such as in personal behaviours. Economics is the study of how incentives work, in negative and positive ways.
- CONVENTIONAL WISDOM is often wrong, given it may have been constructed shoddily. However, the acceptance can be difficult to overcome, except anecdotally. (For example, money does not always buy elections.)
- DRAMATIC EFFECTS often have subtle, or even remote, causes. Answers may be found distant.
- EXPERTS use their information advantage, or ‘asymmetry’, to serve their own agendas. However, technology and particularly the internet has undercut this in certain categories, such as life insurance. How an expert treats you depends on their own incentives. For example, a study of the sale of 100 thousand homes in Chicago revealed that real estate agents would take more time to sell their own house than a client’s (i.e. ten days longer on the market and at least 3% better sale price); the main explanation was that the agent had less expense-related (WIIFM) inducement to hold out as for their own home.
- KNOWING WHAT to measure and HOW to measure it, makes a complicated world less so. Looking at data the right way, with the power of impersonal numbers to explain contradictions and mysteries, helps to explain life riddles.
There are three main categories of INCENTIVES:
- Economic (such as exhibited by government income tax policy)
- Social, such as avoiding been seen or known to be doing wrong (ex. crime)
- Moral, such as avoiding actually doing wrong
Changes to incentives can produce unexpected results. For example, people may be less likely to give blood if appealed to with a small cash award than simple moral appreciation.
W.C. Fields said, “A thing worth having is worth cheating for”. Awareness of the influence of incentives can reduce modern practice of that ruffling concept.
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