Book review: Freakonomics – A Rogue Economist Explores the Hidden Side of Everything

In my time studying Business Management Economics at UC Santa Cruz, I came to appreciate Economics as the underlying force driving many other Social Sciences, including Politics, Sociology, Community Studies, Anthropology, and History. In Freakonomics: A Rogue Economist Explores the Hidden Side of Everything, authors Steven D. Levitt and Stephen J. Dubner assume this same premise to explore the hidden economic forces that connect seemingly unrelated phenomena in American society and history.

They do not argue that economics causes societal issues; rather they use economic models and experiments to explore complex issues, including racism, crime trends, abortion effects, medical malpractice, student and teacher cheating, and effects of parenting. They explore correlation and causality between distant patterns in society to convey an underlying human nature at work. In doing so they manage to prove that conventional wisdom is often wrong.

To me, the most interesting section of the book is what a bagel salesman’s data reveals about employee honesty in varying-sized companies and at different position ranks. Its findings “lie at the intersection of morality and economics,” and demonstrate consistent trends in theft, allowing the interpreter to actually predict theft within a company, given a few basic descriptions.

A bagel man named Feldman leaves bagels and cream cheese in office lounges and kitchens along with a wooden box and a sign requesting $1 per bagel on the honor system. By keeping perfect records (he’s formerly a financial analyst), he inadvertently invents a system to monitor rates of white collar crime.

At his own estranged office he receives a 95% payment rate because his colleagues knew him. But eventually he built his clientele up to 140 companies consuming 8400 bagels a week and the payment rate varied with distinct patters.

With enough data he learned to consider an “honest company” one that paid for 90% or more of its bagels consumed. 80-90% payment rate is annoying but tolerable, and if paid less than 80% Feldman posted a hectoring note. Even though as many as 20% of his clients steal bagels from him, his money box only got stolen 1/7,000 times.

The interesting part of his data is learning the factors shaping trends in honesty. Smaller offices tend to be more honest; a 50-employee company pays 3-5% more than a company with more than 300 employees, which can also be described as a reduction in theft as high as 60%. Unseasonably good weather reduces theft while cold weather has the opposite effect. The bad holidays include Christmas, Thanksgiving, Valentines Day and tax week, which each invoke up to a 15% increase in theft. Holidays that reduce the theft rate include Independence Day, Columbus Day and Labor Day.

Other interesting trends include the positive correlation between honesty and employees who like their boss and work. I was surprised to find an increase in theft as you move up the corporate ladder. Feldman speculates that executives cheated because of a sense of entitlement, or that perhaps cheating is what earned their place as an exec in the first place.

The conclusion of this excerpt, however, is quite positive and inspirational: The vast majority of Feldman’s customers do not steal even though no one is watching.

Freakonomics was a very fun and easy read, and not just because of my background in Econ. It’s entertaining all the way through and there are some very interesting insights into history and the nature of certain professions that you’d never know other than by reading this book. I recommend it.