06 February 2015

Freakonomics

by R.T. Lawton


The cover is a green apple
with the wedge of an orange
During my early years of university attendance, I quickly learned the subject of economics was not my favorite, not even close. Its only theory which seemed comprehensible at the time, and the only one to stick with me through the years, is The Law of Diminishing Utility. You know, the one where the first candy bar tastes great, the second is good, the third is okay and by the time you get to the sixth one, your stomach doesn't feel so good. That one I understand, perhaps because of a personal sweet tooth. The rest of economics was dry, boring and I had no taste for the subject.

Then, along comes Steven D. Levitt and writer Stephen J. Dubner with their book, Freakonomics.  Levitt is a rogue economist, has won several awards in his field and has a way of asking questions that makes economics interesting. Two of my favorite discourses come under the headings of What do School Teachers and Sumo Wrestlers Have in Common, and Why Do Drug Dealers Still Live With Their Moms.

School Teachers and Sumo Wrestlers

Having compiled data on Chicago school teachers who gave the required standardized tests for the program of Leave No Child Behind, and also on sumo wrestlers competing in the required six tournaments held each year to establish ranking and therefore their annual salary based on that ranking, Levitt determined that a significant portion of the subjects in each category cheated. Well, this is a blog on crime and criminals, cheating for position and financial benefit is surely a crime, and I have long been interested in how to prove a crime.

Briefly, for the Chicago teachers, Levitt figured out the simplest way to cheat in the short time teachers had the "multiple guess" test sheets in their possession after the test was to fill in the same block of answers correctly on most of students' answer sheets before the sheets were electronically graded. Let's say the same block of about ten answers somewhere in the later section where the answers were more difficult for the students to get right and the teacher could easily remember the sequence of correct answers. Comparing all the test sheet answers for each class room, Levitt discovered an answer pattern in some classes. To further check his results, Levitt compared this same grade's scores with their scores from the previous year. Some student's scores in the pattern answer classes had somehow skyrocketed. Thus, a few weeks later, the same test was given again to the same students. Normally, you would expect the scores to stay about the same or even improve slightly, but this time, the teachers were not allowed to even touch the answer sheets. The scores of pattern answer students plunged. A dozen teachers lost their jobs for cheating. Why cheat to begin with? The incentives of recognition, promotion and financial gain versus potential censure, and loss of funds.

In his book, Levitt keeps coming back to numbers and incentives for the study of economics. Maybe I would have had more incentive in my university classes if I'd had Levitt for a teacher.

As for the sumo wrestlers, those on the bubble with a 7-7 win/loss record needed to win one more to stay within the elite 66 high rankings. Levitt's data showed that those on the bubble frequently won that one more needed win from those wrestlers who already had high enough win records not to need that last win, even though in previous matches, the wrestler who had acquired the better record usually beat the wrestler who ended up on the bubble. Kind of an "I'll scratch your back, if...," whether the payoff was monetary or a promise to "throw you a match in the future if you need it." Incentives. At the time, the top 40 wrestlers earned at least $170,000 a year, while the 70th ranked wrestler made only $15,000, plus the lower ranks had to do the laundry of the top ranked wrestlers. Incentives.

Drug Dealers and Their Moms

This one was right up my alley. Levitt wondered why crack cocaine drug dealers in Chicago were still living with their moms. Wasn't there a lot of money in the crack business? Didn't this big money mean they could move out from mom's and into luxury apartments?

Through a set of fortunate circumstances (for him), Levitt ended up with a four-year set of business transaction books for a ranking member of the Black Gangster Disciples in Chicago. The leader of a branch of this gang, later promoted to the Board of Directors, had kept a ledger of every crack sales, dues charged, protection fees and costs of doing business before his promotion to the board.

Levitt compiled the data. Yes, there was a lot of money coming in from crack sales, however the organization was comprised of a large pyramid chart and the big money floated to the top. The top twenty bosses in the Board of Directors each stood to make half a million dollars a year, while the leaders of a branch earned about $100,000 a year, but the rank and file standing on the corner were better off flipping burgers at McDonald's. Some of the lower ranks even maintained secondary jobs at low-wage legitimate jobs in order to make enough money to get by. They couldn't afford to move out from mom's place.

Not only could they not afford to move, but the rank and file were the ones taking daily chances on  being arrested or killed. During that same four year period on the streets, the members supervised by that branch leader each had an average of 5.9 times of arrest, 2.4 times of receiving injuries or non-fatal wounds (does not include gang administered beatings for rules infractions), and a 1 in 4 chance of being killed. So why do the job? The incentive was to climb up the pyramid to a leader's job or to sit on the Board of Directors where the really big money was.

Freakonomics and Levitt make economics interesting. Now I have to read Super Freakonomics to find out about Patriotic Prostitutes, and Why Suicide Bombers Should Buy Life Insurance. Whaaat?

3 comments:

Eve Fisher said...

I loved "Freakonomics". Drug dealing as ponzi scheme - makes sense to me. And it's not much different from old-style corporate America (although the death toll in corporations is significantly less - I think), where everyone trades in their 60-80 hr/work weeks for a hope at becoming one of the 4 vice presidents and, eventually CEO. Not very likely, and meanwhile they have no time with their families, no life outside the job, and when they retire with their watch and their rapidly eroding pension, they wonder, "What happened?"

David Dean said...

Maybe this book should be required reading for fledgling drug dealers, R.T. Interesting thoughts here; thanks for sharing them.

Leigh Lundin said...

I taught a couple of classes to European students who cheated like mad. I got to a point at semi-finals, that I created 3 different test booklets, each with the same questions, but in different order. I recall one girl got a score of 7! She'd have done better if she'd simply marked random answers. They sure did love Reese Cups though. I also remember using a Mr. Magoo video to illustrate some point or other.

That's fascinating about drug dealers.

Economics is boring as hell, but each politician should be required to take and pass an economics course. Maybe we would have less stupidity in Washington!