Freakonomics

Freakonomics helps you make better decisions by showing you how your life is dominated by incentives, how to close information asymmetries between you and the experts that exploit you and how to really tell the difference between causation and correlation.

Incentives have been dangled in front of your nose all of your life. From “if you finish your plate you’ll get some pudding” as a child to “if you sell 100 cars this quarter you’ll get a 25% bonus” all the way to “if you don’t stop harassing the cleaning lady, we’ll put you in a home, grandpa!”

An incentive gets you to do more of a good thing or less of a bad thing, and people use it to try and influence your behavior.

Stephen Dubner and Steven Levitt say there are three kinds of incentives:

Economic – usually involving gain or loss of time and/or money. Social  – when chances are you’ll look good in front of your peers or be isolated from them. Moral – appealing to your conscience and inner drive to do the right thing.

The more types of incentives you combine, the more powerful the incentive gets.

For example, the disincentive (a negative incentive, the stick from the stick and carrot approach) to commit a crime is pretty strong. You could lose your job, house and personal freedom (economic), it is one of the most morally reprehensible things you can do (moral) and of course, you’d lose your friends and your reputation would go down the drain (social).

In any transaction between humans, incentives are the driving force at play. So the moment you figure out what makes the person across the table act the way they do (and know the same for yourself), you can make better decisions. Sadly, lots of systems incentivize us to cheat. Information asymmetry is one of these. We all need the help of an expert sometimes. When your knee hurts, you go to a specialist doctor, a professional cuts your hair, and when you want to sell your house, you call a real estate agent. For that last example, the system in place is a strong economic incentive – the agent gets a commission of the final sale price and should therefore try to maximize the selling price just as much as you, right? Well, some simple math reveals that it’s often better for the agent to abuse that she knows more than you, and get you to sell quickly. If your agent can get you an offer for $100,000 within two weeks, and she gets a 10% commission, then that’s $10,000 in two weeks. Knowing it takes her another two weeks to get an offer for $120,000…