7/04/2014

Review of Levitt and Dubner's "Think like a Freak" in Barron's: "Beware of Populist Economics"

This is a copy of my review from Barron's:
The new lessons from the Freakonomics guys are compelling, but deeply flawed. 
Reviewed by John R. Lott Jr. 
The Freakonomics franchise certainly has legs. According to legions of admirers, in their best-selling series that includes Freakonomics, SuperFreakonomics, and now Think Like a Freak, University of Chicago economics professor Steven Levitt and journalist Stephen Dubner have taught us to use economic reasoning to shed light on real-life situations.  In the process, they have also shown that economics can be fun. 
But the fun quotient is ultimately diminished by the fact that their stock in trade is naive economics. Typically, Levitt and Dubner fail to understand that when a problem arises in a market, it generally provides an incentive for those involved to remedy the problem.      Take the sour-lemon story. "A new car that was bought for $20,000," they assured us in Freakonomics, "cannot be resold for more than perhaps $15,000. Why? Because the only person who might logically want to resell a brand-new car is someone who found the car to be a lemon. So if the car isn't a lemon, a potential buyer assumes that it is."  
Stories like these have clearly appealed to those who enjoy clever portrayals of a dysfunctional world. But a little research would have revealed that, contrary to Levitt and Dubner, used cars with only a few thousand miles on them sell for almost the same price as when new. One obvious reason: Since car manufacturers allow warranties to be transferred to new owners, potential buyers know that even if they do buy a lemon, they will not be stuck with it. 
In Think Like a Freak, the authors promise to teach us what "it takes [to be] a truly original thinker." But rather than promoting original or critical thought, their book tries to convince us of one main thing: People are stupid. We are thus confronted with half-baked theories similar to those in their previous books. 
Take the example that Think Like a Freak starts out with: soccer players in the World Cup doing what is best for their own reputations rather than what is best for their team. We are told that, when a player kicks penalty shots, aiming toward the center has a better chance of success, but that fear of shame prevents players from doing so. The potential shame of kicking the ball right into the hands of a goalie standing in the middle of the goal, especially during the World Cup, keeps players from doing what is best for the team. 
The data cited to support this view are a bit rough. We are informed that "only 17% of kicks are aimed" at the center of the goal, even though "75% of penalty kicks at the elite level are successful." But the real problem is that, per their usual habit, the authors assume no one else involved is smart enough to detect this cheating. If, by kicking the ball to the side, players really are failing to score, it defies belief that team owners and coaches would be blind to this abuse and allow it to continue. 
Since the team's gain from winning is far greater than any shame the player risks, incentives can be used to make sure that players do what is best for the team. Stiff financial penalties can be imposed, including the penalty of being fired from the team. Then there are other kinds of possible shame, meted out to these players in front of other team members, for not serving the interests of the team. 
In the ivory-tower world of Levitt and Dubner, however, owners and coaches are completely ignored, since including them would only ruin a clever insight. I contacted actual soccer coaches at three different colleges, and found that they did not agree with the authors' premise that the center shot in a penalty kick is the best strategy. Not surprisingly, then, players seem to obey their coaches' dictates on penalty kicks. . . .
The rest of the review is available here.
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Space constraints limited what I was able to write.  For those interested, here is part of what I had originally included in the review that I sent in.
Or take their discussion about wines.  People supposedly keep buying the expensive wine even though they really can’t tell which is the premium wine and the cheap stuff.  If you believe Levitt and Dubner, these wine drinkers are making a mistake to pay more for the so-called higher quality wine. Again, possibly people are just self-deluded or dumb, but there are other possibilities.  Aged wines may not taste better, but simply different.  For example, it is costly to store wine for decades.  As wine ages, the tannins in the wine disappear and one can find out how the wine tastes uninhibited by the tannins.  Price differences would thus be due to the different costs of producing different wine, not a result of differences in demand. 
Alternatively, Professor Orley Ashenfelter at Princeton found that he could very accurately predict the price of wine by simply looking at the amount of winter and harvest rainfall and the average summer temperature in the vineyard.  If wine prices are random, how is it that prices can be predicted so accurately based on growing conditions?  
As a primary example of the “truly original” thinking Levitt and Dubner claim to have done, they point again to the assertion discussed in Freakonomics that liberalizing abortion lowers crime rates.  The problem with this bragging is that neither the basic idea that “unwanted children” who are brought up in bad environments that lead to crime was not a new idea nor was their test of it. 
 While these authors take credit for the idea, it is actually an old argument.  The 1972 Rockefeller Commission on Population and the American Future cited research purporting that the children of women denied an abortion didn’t get the attention that others received and “turned out to have been registered more often with psychiatric services, engaged in more antisocial and criminal behavior, and have been more dependent on public assistance.”  Roe v. Wade even discusses the consequences of “unwanted children” not getting the attention that they need. 
The research the commission cited went back even further.  For example, a 1966 study followed the lives of children born to 188 women who were denied abortions from 1939 to 1941 at the only hospital in Gothenburg, Sweden.  They compared the lives of these kids over the next twenty years to the next child of the same sex who was born after them.

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2 Comments:

Blogger Nathan Jewell said...

Well done, as usual, John. Thanks for sharing your insights on this.

7/05/2014 10:49 AM  
Blogger Angela Navejas said...

This is very nice blog in which you discuss the topic Review of Levitt and Dubner's "Think like a Freak" in Barron's: "Beware of Populist Economics" which is very interesting.

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8/11/2014 8:02 AM  

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