Freakonomics: How Incentives Are Powering Decision Making
Everything in economics can be viewed from the point of incentives. Whether this means something brings you financial, emotional, or even community benefit. Each and every person has individual reasons for pursuing a career, or goal. The examples include: school teachers and sumo wrestlers cheating, the Ku Klux Klan and real estate agents purposely creating an information disparity, or drug dealers risking their lives in order to make menial pay checks. All of these examples, while discussing a different primary issue, are all powered by incentives and can clearly be seen as such. Throughout this essay I will provide further information on these situations, and how each of them can be tied back to the overall theme of incentives powering decision making.
In chapter three of Freakonomics, Levitt and Dubner discuss how drug dealers and the drug trade are often very similar to how American business works. Suhdir Venkatesh led this research initially when he met a gang leader in the Chicago area named J.T. Sudhir was able to talk to J.T. and his gang in order to gain valuable information on how their gang was run. In J.T.s gang was a member nicknamed Booty. Booty allowed for Sudhir to peruse the gangs financial records, as well as their their strategies, and their benefits for family members of dead members. Much like a franchise in the American business model, the lower tier “managers” and “foot soldiers” paid their dues to the members above them. For example, J.T. paid the members above him in the Black Disciple gang roughly 20% of their monthly income. He was also tasked with paying his various employees, including, bodyguards, foot soldiers, and runners. However, for his trouble of being a leader of the Black Disciple gang in Chicago he was able to bring home roughly 100,000 dollars per year. This is far more than his members made. If you look at this from the point of view of an American business it can be seen as a manager paying his employees, running a location, and sending the profits to a franchise owner. When viewing J.T.’s position in the sense of incentives, it's clear that he was driven by financial gain. J.T. ran his gang to bring in as much profit as possible regardless of the safety risks. Though, the foot soldiers do not quite have the same incentives. For example, if you are being paid a minimum wage at McDonalds, you may remain at that job due to financial security and the opportunity to be promoted. In contrast, being a foot soldier selling crack has far more risk involved. These lower tier members of the gang remained while the financial incentives outweighed the danger. When J.T.s gang became involved in a turf war, many of his members realized that the danger of being murdered became more and more likely. Knowing they were not in line for promotion, and not receiving any additional pay for the increased danger, J.T. saw many of his “employees” leave the drug trade. While selling crack is not necessarily a traditional job, it still clearly follows the same rules. As incentives are viewed as being worth the danger, time, or effort people will willingly work an undesirable position. Though, as soon as these incentives become less valuable than the risks taken, employees will start to leave a job to find better options.
Incentives continue to be shown in various ways. For example, in freakonomics the authors discuss a chicago daycare in which they commonly had issues of parents arriving later than their pickup times. In order to combat this they enforced a late fee policy. However, following this policy the number of late parents increased rather than decreasing. This is due to different incentives. If a parent leaves their child at a daycare later than intended, they have a social incentive to improve in order to show they care about their child and are not neglectful. Though, when a very small fee is imposed on these parents, they are able to use this fine as an excuse as to why it is acceptable to leave their children in daycare longer. “I am paying for my child to stay longer at the daycare so I do not need to pick them up as early.” If the fee that was put into place was a significant amount of money, you would likely see these parents arriving earlier to pick up their children as the economic incentive is now pressing them to do so. Similarly, school teachers in the Chicago area have a very strong incentive to help their students cheat on their federal exams. The overall test scores of a class can often determine whether a teacher receives a pay increase, a promotion, etc. So, if a teachers class is underperforming, then the teacher has an economic incentive to add correct answers to a students test in order to improve scores. When the idea that these teachers may be cheating on student exams, an investigation was launched. In this investigation researchers examined scores when a teacher was not available to alter answers. Following this investigation, it was clear that Chicago school teachers had been altering answers in about 5% of their classrooms. After publishing the results of this research, cheating in the Chicago school system dropped by roughly 30% the next year. These numbers fell due to the economic risk that these teachers could lose their jobs. They were also motivated by the moral incentive that they would be looked down on by friends and peers if they were discovered to be one of these teachers altering answers. These same types of incentives can be seen in all different aspects of life. I have personally witnessed multiple examples of this. During the ACT test I clearly witnessed a person reading off of notecards under their desk. When thinking about why a person would cheat on the ACT multiple things come to mind. Economic incentives would likely include a better financial aid package from a college. Many colleges use ACT scores in conjunction with GPA to determine how much financial aid can be accessed by a student. This person must have believed that their score would not have been good enough to receive the financial aid package they desired. However, this attempt was unsuccessful, as merely twenty minutes into taking the ACT this person was caught cheating and was removed from the test. Due to this, the person likely had to pay to take the ACT again at a later date. They likely lost about seventy five dollars for the signup fees, as well as any income that may have been earned from a job.
Information asymmetry is the primary issue discussed in chapter 2 of freakonomics. The authors first show this asymmetry when discussing the Ku Klux Klan. early on the Klan's incentives were to remove all people of color, or people they considered degenerates from their area. They did so by creating information asymmetry. The Klan intended to use scare tactics in order to suppress members of society. For example, at the height of lynchings in the United States, a relatively small number of African Americans were lynched. This could be due to the Klan's overall goal of intimidation. While they were not lynching constantly, they used the lynchings as a way to try to intimidate African Americans and others to follow their code of conduct. Another example of information asymmetry is the real estate market. When a person pays a real estate agent to sell their house they do so in order to get the best deal possible. However, that is not necessarily the goal of the real estate agent. When an agent sells a home, they receive a certain percentage of the profits received. However, when a house can be sold for 10,000 more dollars the agent only receives a very marginal percentage of this amount. So this incentivises the agent to sell the house for a decent value, as quickly as possible instead of waiting on the highest sale value. They are able to do this because a real estate agent possess more information about the housing market, sale prices, and sale times. This is the information asymmetry discussed. An agent may leave a client in the dark about these values in order to turn a profit quicker. Finally, The Weakest Link tv show showed another example of this. In the filming of this show, a clear bias against Latinos and the eldery was showed. During the first half of the game an unreasonable number of latinos and the eldery were removed from the game. It is my belief that this is due to people having a misconception that these groups would somehow be less able to accurately answer trivia questions even though this is clearly not the case. In my opinion, I believe the practice of reinforcing information asymmetry is highly unethical. It is clearly unethical for someone to hide information that you are paying them to disclose, hide information in order to intimidate a group of people, or hide information in order to reinforce a bias. The most ethical course of action is true transparency. Honestly, while it may not always give you the desired result, is always the most ethical possible choice. The most recent example of information asymmetry that I have experienced was at a recent job. This job (which I shall not name for the purpose of anonymity) made a promise to me during the summer months that I would easily be able to receive thirty hours per work in my current position. However, as time went on I was not receiving the hours that I was previously promised. I continues to discuss the issue with my manager and was told countless times that this would be changed, though it was not. Finally, roughly two months ago as this manger left his position he informed me that I would never have actually been able to receive thirty hours at that job and that he was merely telling me that in order to prevent me from quitting the position. This again was extremely unethical. Due to my managers misinformation I was forced to take out additional loans in order to pay for my existing bills. Following this, I promptly left the position for one that I felt was more trustworthy and honest.
In conclusion, every position and every situation has their own individual incentives. Whether that is, a drug dealer risking their lives in order to bring home money for their family, real estate agents lying or hiding information from clients in order to make money quicker, or school teachers cheating on their students exams to raise scores in order to receive a promotion. All people, realizing it or not, are making decisions based on how the possible incentives either positively or negatively affect their lives.
