by Steven D. Levitt and Stephen J. Dubner
Reviewed by Jon Ford, CFP®
I couldn't turn the pages quickly enough. Steven Levitt is one of the freshest young economists I have ever read. He sees the world as others do, but quickly wonders about relationships that elude the rest of us. His premise is, "If morality represents how we would like the world to work, then economics represents how it actually does work."
A series of examples has the potential to take readers down a road that will greatly redefine how they view the world. The author seems comfortable moving within philosophy, psychology, and sociology to bring powerful economic analytical tools to bear on "freakish curiosities" that occur among us. This new invented field of study he calls "Freakonomics."
The study of the hidden side of everything is what this book is about. He discusses why the "experts" bend the facts, and why knowing what to measure and how to measure it is the key to understanding life. Real estate agents, as one example, have an overwhelming disincentive to earn sellers a higher price.
Here's how it works. A $300,000 house earns a commission of $18,000, split between the buyer's agent and the seller's agent. If half of that goes to the agent's agency, then only 1.5 percent of the purchase price goes into the agent's pocket. If your house is really worth $310,000, which could put $9,400 more in your pocket, but only $150 more for your agent, "Do you think your agent is willing to put in the extra time, money and energy for $150?" asks the author.
Because real estate sales are a matter of public record, the author could unequivocally conclude yes. The author discovered that real estate agents sell their own homes at 3+ percent more than comparable homes. They do that by holding out and keeping their houses on the market an average of ten days longer. They don't take the first "decent offer," in striking contrast to advice usually offered to their customers. This can be compared, says the author, to a stockbroker churning an account. It is the turnover volume that becomes important, not the customers' best interests.
In the same way, the author introduces readers to the dark side of incentives—namely cheating. Schoolteachers and sumo wrestlers alike are held up as examples in this arena; both fudge facts and circumstances to reap the reward or avoid ostracism.
If this sort of inquiry stimulates your curiosity, you'll like this book. If you want to know why drug dealers still live with their mothers, the relationship between abortion and crime rates, what makes for a perfect parent, and how the Ku Klux Klan is like a group of real estate agents, this is the book for you. As for me, I could become addicted to Freakonomics.
Jon Ford, CFP®, is president of CF Financial Planning Solutions, Inc. in Cedar Falls, Iowa.
HarperCollins Publishers, Inc.
$25.95 (Hard cover: 242 pages)