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

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Chapter 2
Summary

The authors open this chapter with an anecdote about the Ku Klux Klan. To explain the similarity of the K.K.K. to realtors, the writers trace the K.K.K.’s history from its founders, a group of six men who apparently begun the group as a harmless midnight prank. Rapidly, the Klan developed into a multistate extremist group designed to not only terrify black people but also to assassinate emancipated slaves. The Klan did its work through lynching, pistol-whipping, castrating, burning, and shooting both former slaves as well as white counterparts who joined the fight for black people to have the rights to vote (50). After laying low for about a decade, the Klan revived claiming eight million members. Its concerns this time included not only black people but also communists, immigrants, Catholics, Jews, and any other people that disrupted the status quo. What mostly instilled fear among people was the fact that Klan members included sheriffs, deputies, and police officers. Importantly, Levitt and Dubner reveal that “Yes, the Klan was a secret society reveling in passwords… but its real power lay in the very public fear it fostered” (51). However, the power of the K.K.K. was coming to an end when Stetson Kennedy a man with Klansman bloodlines but dedicated to ending bigotry decided to join the Klan undercover with the intentions of revealing their secrets to the public. By this time, the K.K.K. was less violent, but as stated by Levitt and Dubner, the lynching incentive scheme developed by the K.K.K. was terribly frightening compelling blacks to abide by the Klan’s laws. Kennedy knew that exposing the K.K.K.’s secret information would be a powerful weapon to destroy the group, and thus, Kennedy used the information to destroy the Klan by learning most of the secret codes used by the Klan members (57). After garnering enough vital information to destroy the Klan, Kennedy used a powerful mass media platform of his time: the radio. He fed journalists such as Drew Pearson with reports about the K.K.K.’s secrets, which reached people through programs such as the Washington Merry-Go-Round that had millions of listeners daily (57). Kennedy’s plan worked and the news about K.K.K.’s corruption and brutality spread across the nation culminating in the group’s downfall. 

Levitt and Dubner continue to show the power of information as an incentive of manipulating others. In the 1990s, life insurance prices fell rapidly posing a mystery in the market since the prices of other types of insurances were certainly stable. The authors attribute this occurrence to the advent of the Internet, paving way for websites such as Quotesmith.com, which enabled customers to compare insurances within seconds, and making an informed decision basing on price (59). Indeed, information is an encouragement, an olive branch, a cudgel, or a restriction depending on who gets hold of it and how one uses it (60). 

Revisiting the illustration of real estate agents, the authors demonstrate the power of asymmetrical information, which is a situation where experts utilize information advantage to their gain (60). The authors state that in the current community, experts often utilize information asymmetry to their gain, regardless of their responsibility to look out for a clients’ interest. To explain how information asymmetry works, Levitt and Dubner provide a scenario of a funeral director put in charge of managing a funeral plan. A funeral manager would take advantage of a person that has lost a loved one and steer them toward buying an $8,000 mahogany casket simply because there is an incentive to gain. However, in a cool-headed tranquil of one’s house, the authors assert that a person can use the Internet to buy the same mahogany casket at a much lower price of close to $3,595 (62). Similar to the K.K.K.’s pattern of using passwords, real agents also have their coded ways of conveying information to potential buyers using phrases, thereby, taking money out of their customers' pockets.

How people provide information contrary to their characteristics or actions explains further the power of information asymmetry. Levitt and Dubner posit that people are likely to manipulate information in their personal lives, for example through online dating, during their first dates, or during interviews for personal gains. In online dating individuals too often, project an image of themselves, which is not entirely accurate (71). The authors sum up the chapter by stating that a major gap exists between the information people present to the public and the one they secretly know to be true.

Analysis

This chapter focuses on information asymmetry — a situation where a person has more information advantage over others. Information asymmetry instills fear in clients who believe that they may not attain better deals since someone else is controlling the knowledge. Information played a vital role in the rise and fall of the Ku Klu Klan, how real estate agents sell property, the way funeral managers take advantage of those in vulnerable situations, how life insurance companies were at an advantage when the public lacked the ability to compare pricing between different competitors, and the ways in which people create online dating personas that are different from who they are in real life. All these examples show how a certain group of people use the power of information to manipulate people. The authors use these scenarios to demonstrate the impact of incentives in changing a person’s behavior as incentives are the primary reason why people act the way they do. In an economic perspective, consumers tend to maximize their individual satisfaction while sellers strive at maximizing profits. This explains why a funeral manager would sell an expensive casket to an emotionally compromised person.

Importantly, the authors claim that in pursuit of information asymmetry, fear is developed. However, although society desires its people to be smart, exploiting that information for personal gains results in fear and mistrust. Besides, the authors note that anyone can misuse information by twisting the truth from reality. However, Levitt and Dubner state that the advent of the Internet has significantly altered the way experts abuse information. The Internet has enabled the cost of acquiring and providing information to decline dramatically for everyone including real estate agents. In this chapter, the authors use informative tone to reveal the naivety and unawareness of most average Americans. This information itself can help readers from falling into the traps of experts with an information advantage.

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