Freakonomics

Writes Levitt, who wrote the economics book Freakonomics: A Rogue Economist

Exploresthe Hidden Side of Everything. New York: William Morrow, 2005.

“Economics is, at root, the study of incentives: how people get what they want, or need, especially when other people want or need the same thing … An incentive is a bullet, a lever, a key: an often tiny object with astonishing power to change a situation.”

If the incentive is great enough, with enough of a payoff in the end, people will go to great lengths to achieve it. Levitt and Dubner look at a variety of examples in different cultures and explain how incentives can cause people to do amazing things: for good or ill. “Freakonomics” is the hidden side of how incentives really work.

Incentives cause people to do amazing things for good or for ill. Take cheating, for example, which the book defines as “a primordial economic act: getting more for less.” People will risk an awful lot if the incentive is great enough. In 1987, for example, 7 million children in the United States suddenly disappeared on April 15. Was it a massive alien abduction? Hardly. See, before 1987 people were only required to put the names of their dependents on their tax forms. Beginning in 1987, both names and social security numbers were required for each child listed. Overnight seven million kids, who had never been kids at all, simply vanished. The risk of getting caught outweighed the incentive of the tax break. Incentives can cause a salesperson to work harder, or they can cause him to fudge his numbers to look like he has worked harder. Incentives can make a top sumo wrestler throw a match in order to fatten his wallet. Incentives can determine how a real estate agent lists your house for the quickest sale (incentives which are likely different from yours).

The bottom line? Incentives are the glue that really runs our whole economy — we want the best for ourselves without having to do much for it.