Freakonomics
Stephen J. Dubner and Steven D. Levitt
Contributed by Marshall Raine

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Chapter 1
Summary

Levitt and Dubner begin the chapter by posing a question about the relationship between schoolteachers and Sumo wrestlers. In this chapter, the authors describe how people likely to depict a high level of honesty and integrity often find subtle ways to cheat with the focus of advancing, elevating their monetary awards, or advancing their positions when incentives are attractive. An example is shared to explain the impact of incentives on human behaviors. According to Levitt and Dubner, a pair of economists tried to provide a solution to a manager of a day-care center whose parents were required to pick up their kids by 4 P.M. but a few parents were often late. The authors assert that "a typical economist believes the world has yet invented a problem that he cannot fix if given a free hand to design the proper incentive scheme" (16). Therefore, the economists who heard the manager's quandary decided to offer a solution by conducting a study, which took twenty weeks. The economists enacted a $3 fine in the eighth week, but instead of seeing the number of late pickups decline, they actually rose.

To explain why the incentive plainly failed, the authors describe three various forms of incentives: social, economic, and moral. Levitt and Dubner posit that "economics is, at root, the study of incentives: how people get what they want, or need, especially when other people want or need the same thing" (16). An incentive has the power to alter a situation, and apparently, people react to incentives, positive or negative, from the conception of life. The authors argue that the components of incentives, moral, social, and economic simply urge people to "do more of a good thing and less of a bad thing" (17). Thus, this explains why many people do not engage in crime as the economic incentives associated with going to jail, such as losing a job, a family, and freedom are certainly very strong. The authors further argue that when it comes to moral incentives, people nor want to do something they view wrong neither do they want other people to see them doing something wrong. Therefore, to explain why the Israeli day-care center incentive did not work, Levitt and Dubner state that the $3 fine was too small and most parents could afford an extra $60 every month for being late. Importantly, the authors note that the $3 economic incentive fine replaced a moral incentive because parents could buy off the guilt they felt for picking up their kids late.

To take the readers back to the chapter’s question ,What Schoolteachers and Sumo Wrestlers have in Common, Levitt and Dubner state that the powerful and peculiar nature of incentives compels people to alter their behaviors. Arguably, the authors postulate that if blood donors were offered incentives rather than a gratuity, the number of donors would not only increase dramatically but also this could completely change people's behavior to a point of stealing blood at knifepoint or even passing off animal blood as theirs. To connect their thoughts, Levitt and Dubner use a quote from W.C. Fields by saying that "a thing worth having is a thing worth cheating for" (20). In other words, as long as the incentive is right, just about anyone can as well as participate in cheating.

Incentives, such as promotion, monetary awards, or high social status compel teachers and sumo wrestlers to cheat. For example, the authors provide a narrative about the high-stakes testing in Chicago Public Schools, whereby federal government authorized high stakes testing as a strategy of measuring students' progress (22). The new policy focused on placing schools with small reading scores on probation and , more extremely, the possibility of being shut down and its staffs reassigned or dismissed. For a teacher to promote a third, sixth and eighth-grade student, a student had to get a minimal score in the Iowa Test of Basic Skills, a multiple-choice standardized exam. The policy also changed the incentives for teachers who had to ensure that students passed, thereby, increasing chances of promotion and avoiding dismissal. If a school performed poorly, the federal would withhold the funding, but if the students improved, the policy presented positive incentives to teachers including a bonus of $25,000 (23). Levitt and Dubner argue that to get the bonus some teachers would inflate the students' scores or find ways of obtaining a copy of the exam illegitimately and prepare the students in advance. However, to detect the cheating, Chicago Public Schools used an algorithm that would reveal an unusual pattern of answers, particularly among the five simple and last hardest questions. To identify the cheating teacher, in 2002, the new chief executive officer of Chicago Public Schools, Arne Duncan, re-administered the standardized examination in 120 classrooms with non-cheaters acting as the control group (32). Surprisingly, the outcome was astonishing, as the cheating algorithm had predicted. The Chicago Public Schools board fired cheating teachers leading to a decline in cheating by over 30% the following year, thereby, revealing the power of incentives.

In Japan, Sumo is both a national sport and a repository of the nation's traditional, military, and religious emotion (34). Levitt and Dubner inform readers that the incentives scheme in Sumo is strong and attractive as it determines a wrestler's life in regards to how he eats, sleep, makes money, and most importantly, the honor they garner. A Sumo wrestler near the highest rank not only earns millions but also receives a nobility respect. A wrestler's performance in tournaments determines their ranking, which the country measures six times annually. As a result, a wrestler with a record of 7-7 joining the closing day of a competition has more to gain from winning than a contestant with a record of 8-6 wrestler would have to lose (38). Thus, with the right incentive, either social or economic, a wrestler with a record of 8-6 might let a 7-6 wrestler to defeat him.

The authors share another example of cheating using an incident about Paul Feldman. Feldman started his business by supplying bagels to his staffs as a reward whenever they won a research deal. To regain his costs, he placed a cash basket indicating the price of each bagel, and in return would collect 95%, and considered the underpayment of 5% as an oversight. Feldman quit his job and started supplying bagels to 140 firms in a week. When Feldman started his bagel business, he anticipated a 95% payment rate, however, the rate was actually 90% (43). To explain the reduced rate, the authors indicate that not only did Feldman's presence prevent theft but also the bagel eaters knew him, thus, developing good feelings about him. Feldman realized that small firm's payment rate was higher than large companies were. Based on Feldman's report, Levitt and Dubner argue that small/bigger companies reflect street crimes. Essentially, there are more street crimes in cities than in small communities since rural areas tend to exert high social incentives against crimes such as shame. Overall, the authors assert that majority of people are honest, thereby, agreeing with Adam Smith's argument about the inherent honesty of mankind as featured in his book The Theory of Moral Sentiments (46).

Analysis

Levitt and Dubner take the concept discussed in the introduction about incentives and provide an in-depth analysis in this chapter. According to the authors, economic, moral, and social incentives have the power to change a person's behavior, either negatively or positively. An incentive is a recurring theme in Freakonomics, and in fact, Levitt and Dubner believe incentive to be requisite to the study of economics. The authors inform the readers that moral incentives exist to define how people act out of conviction or consciousness. Contrary to social incentives by which a person’s actions are associated with glory or shame, economic incentives as the authors reveal compels people to act and even cheat for their financial gains. 

The authors explain the three types of incentives using three anecdotes: the Israeli day-care center, cheating of schoolteachers and Sumo wrestlers, and finally recapping the chapter with the bagel seller, Paul Feldman. Using the Israeli day-care center story, a reader learns that people use incentives to buy off their moral guilt,. For instance, instead of parents reducing their late pickups, economic incentives substituted the moral incentives by eliminating their sense of guilt once they had paid the fine, thereby, increasing the number of late pick-ups. In this perspective, the parents weighed the costs and benefits of the fine and determined that paying the extra $60 was worth the additional free time. Undoubtedly, incentives apply in various ways to gauge a society, especially people expected to be honest in a community. Cheating teachers, for instance, react to incentives in a way that would result in personal gains. They inflate students' marks for economic gain including fear of losing their job or facing reassignment. An equally compelling evidence of incentives at work is the Sumo wrestlers who with a small economic incentive, such as a bribe, cheat to assist an opponent to maintain his present ranking. 

By cheating, an individual is able to gain more for less effort and thus, maximizing the marginal utility. This explains why even rational people like teachers get motivated to cheat. The authors use the various examples to bring to the reader's attention to the role of federal regulations in controlling the unforeseen consequences of incentives. The government provides social and economic incentives not to cheat, such as losing one's job, house, and freedom, as evidenced in the case of Chicago Public Schools "high-stakes testing". It is also worth noting that the negative powerful nature of moral incentives explains the inherent honesty of humankind as explained in Smith’s book The Theory of Moral Sentiments.

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