Thoughts on economics and liberty

A review of SuperFreakonomics (Penguin Australia, 2009)

SUMMARY: Strongly recommended. Great read. Great many new insights.

Background (general ramblings)
This is a ‘running’ review of SF by Steven Levitt. I read one of its chapters in The Australian (global warming) and another in The New York Times (below). Browsed through it in a bookshop. And then bought it a few days ago, in a discounted Christmas sale (Paypal). A book worth keeping – not merely reading from the libraries (and, of course, I own – and highly recommend – Freakonomics, which came out a few years ago).

I’ll build this review over the coming weeks (or even years), depending on the time I find. I’m also placing (at the bottom of this page) extracts from the book that are freely available on the internet (I prefer to have access to electronic versions that allow me to cite the book quickly when I need to. Copyright of the electronic material, of course, belongs to Levitt and Dunbar)

I begin with a few highlights that everyone should understand. These seem to indicate that much of what we think we ‘know’ is wrong (this book talks only briefly about things like heuristics and behavioral economics, but I suppose that is by now a part of our self-awareness).

a) Difficulty of distinguishing between skilled experts
Example: “measuring doctor skill is a tricky affair” (p.74)
The book does an excellent job in showing how hard it is to determine the truth about other’s skills. Not only are initial assumptions likely to be false but self-selection issues, incomplete data, random factors, and interactions, contaminate any decent understanding of causality. In the end, after controlling for a wide range of variables, it was found that the difference in outcomes between the worst and best doctors is actually very small. Most perform close to the average. The so-called good doctors will make as many bad decisions as so-called bad doctors.

Example: ordering matters
The example here was of economists who publish papers jiontly, with names being listed in alphabetical order. Because the person whose last name starts closer to A gets listed first, over the course of a lifetime, that person becomes more famous (and earns more) than the one whose name starts with Z.

b) Principal Agent problem
Example: Making something illegal doesn’t stop it.
Prostitution is banned in Chicago. As a result, while the head of police in Chicago works against prostitutes, his police officers do the exact opposite. “A Chicago street prostitute is more likely to have sex with a cop than be arrested by one” (p.41)

c) Experimental economics and its fundamental flaw
Example: altruism is over-rated (p.122)
People conducting altruism experiments forgot to factor in the presence of the experimenter! As a result most of what they found was plain wrong! This shows that humans are rational and will act according to the context. Experimenters have to be very smart else they simply won’t understand how humans think.

d) How to live longer
Buy an annuity. If you take out an annuity, the ‘steady payout provides a little extra incentive to keep chugging along’ (p.82).

e) Chemotherapy is a waste of money in most cases
Except for “leukemia, lymphoma Hodgkin’s disease, and testicular cancer … in most other cases, chemotherapy is remarkably ineffective.” (p. 84)

f) Finding terrorists requires enormous accuracy of modeling
“if you want to hunt for terrorists, 99 percent accurate is not even close to good enough” (p. 92)

g) Voluntary donations of kidneys is trumped by sale of kidneys
America and most western nations have an aversion to organ sale as a result of which thousands of Americans die each year without receiving kidneys (for instance). Iran, on the other hand, instituted a system of paying for kidneys, and over the past 30 years there has been a fully met demand for kidneys in Iran. The best place in the world to live if you have kidney failure. (p.125). Iran is “the only country that has recogized altruism for what it is – and, importantly, for what it is not”. Btw, Gary Becker promotes the idea of a market for organs. Very sensible.

h) Al Gore is a pure idiot
This is my way of chacterising Al Gore (not Levitt’s, who is far more circumspect). I say this not only because Al Gore’s famous movie ‘An Inconvenient Truth’ contains blatant over-statements (lies?), but also because he dismisses the very possibility of geo-engineering, thus: “I think it’s nuts. … If we don’t know enough to stop putting 70 million tons of global-warming pollution into the atmosphere every day, how in God’s name can we know enough to precisely counteract that?” (p.200, 203) That is stupidity personified. This man is not only totally ingorant, but doesn’t have the ability to understand plain basic science. And yet he managed to become Vice President of USA.

The reality is that there are a vast number of potential solutions to the alleged problem of man-made global warming (a matter on which I’m more inclined to side against the IPCC and current received knowledge). Levitt’s book highlights a few reasonable ones. Even assuming that the current slight warming over the past century has anything to do with man-made causes, we are now in a position to regulate the temperature of the earth almost like regulating our own air-conditioned cars and houses. Ridiculing geo-engineering is like ridiculing science itself. Shame on Al Gore.

i) Solar energy heats (not cools) the world
Because “only about 12 percent [of light from the sun] gets turned into electricity” the rest is first absorbed (not reflected) by the black solar cells, and then irradiated (i.e. leaked out into the air, not reflected back into space). Net effect: heating of the world. (p.187)

j) Properties of CO2.
There is nothing like Plimer’s book for understanding the details of these things, but a few points stand out in SuperFreakonomics:

– a doubling of CO2 traps less than 2 percent of the outgoing radiation emitted by the earth. In other words, the ‘forcing’ of CO2 is very weak, being governed as well by the law of diminishing returns (p.184).

– doubling the amount of CO2 while holding other inputs steady, yields a 70 per cent increase in plant growth (p.195)

– CO2 levels were above 1000 ppm 80 million years ago when our mammalian ancestors were evolving (in fact this has been found to hold even 35 million years ago – see study cited in my Plimer blog) (p.183). Indeed, prior to that there were no ice caps on Earth. Ice caps formed when CO2 levels dropped to 1000 ppm. Therefore current CO2 levels are one of the lowest in the history of the earth, and only by increasing these levels well above 1000 ppm will ice caps dissolve. This points to the need to start shifting to non-CO2 based energy sources (such as nuclear) but there are now many other ways
to cool the world, as well (geo-engineering).

– human activity accounts for just 2 percent of global CO2 emissions, with the remainder generated by natural processes like plant decay (p.171).

k) Climate models are deeply flawed
– “even the most sophisticated climate models don’t do a very good job of representing such [an extraordinarily wide range of] variables, and that obviously makes predicting the climatic future very difficult.” (p.168)

– “The current generation of climate-prediction models are, as Lowell Woods puts it, ‘enormously crude'” (p. 181). “there’s an enormous amount of natural phenomena they can’t model”.

l) Child car seats (booster, etc) are barely better than seat belts
“For preventing serious injury, lap-and-shoulder belts … performed as well as child safety seats for children aged two through six. But for more minor injuries, car seats did a better job, reducing the likelihood of injury by roughly 25 percent compared with seat belts.” (p.156)

m) Doctors kill more people than motor car crashes or breast cancer.
“In a 1999 report called ‘To Err is Human’, the Institute of Medicine estimated that between 44,000 and 98,000 Americans die each year because of preventable hospital errors – more than deaths from motor-vehicle crashes or breast cancer” (p.204). Why? Because doctors don’t wash their hands.

n) Circumsicion as a part of the ‘solution’ to HIV/AIDS
“circumcision was found to reduce the risk of HIV transmission by as much as 60 percent in heterosexual men”. (p.208) [NOTE: A commentator – below – has provided a contradiction of this “fact” – so as is usual in everything I suggest – please keep your mind open to the more accurate facts]

etc. etc. etc. This book is a gold mine.

Much as I’d like to write more, there’s not time at the moment. I hope you get a sense of the wide range of issues raised in this book. Most importantly, it helps us to understand the significant failure of human knowledge in virtually all fields, and the need for continued humility and curiosity. Do not block out any source of new information. Explore it carefully, but never ‘finalise’ your views on anything. Keep searching for the truth.

From NY Times:
Unbelievable Stories About Apathy and Altruism By STEVEN D. LEVITT and STEPHEN J. DUBNER
Published: October 16, 2009

The following is an excerpt from chapter three of “SuperFreakonomics,” by the authors of Freakonomics.

We all witness acts of altruism, large and small, just about every day. We may even commit some ourselves. But economists don’t know anything about such behavior, do they? Sure, liquidity crunches and oil prices and even collateralized debt obligations — but social behaviors like altruism? Is that really what economists do?

For hundreds of years, the answer was no. But in the early 1960s, a few renegade economists had begun to care deeply about such things. Chief among them was Gary Becker, the longtime University of Chicago economist who was awarded the Nobel Prize in 1992. Not satisfied with just measuring the economic choices people make, Becker tried to incorporate the sentiments they attached to such choices.

Some of Becker’s most compelling early research concerned altruism. He argued, for instance, that the same person who might be purely selfish in business could be exceedingly altruistic among people he knew — although, importantly (Becker is an economist, after all), he predicted that altruism even within a family would have a strategic element. Years later, the economists Doug Bernheim, Andrei Shleifer, and Larry

Summers empirically demonstrated Becker’s point. Using data from a U.S. government longitudinal study, they showed that an elderly parent in a retirement home is more likely to be visited by his grown children if they are expecting a sizable inheritance.

But wait, you say: maybe the offspring of wealthy families are simply more caring toward their elderly parents?

A reasonable conjecture — in which case you’d expect an only child of wealthy parents to be especially dutiful. But the data show no increase in retirement- home visits if a wealthy family has only one grown child; there need to be at least two. This suggests that the visits increase because of competition between siblings for the parent’s estate.

What might look like good old-fashioned intrafamilial altruism may be a sort of prepaid inheritance tax.

Some governments, wise to the ways of the world, have gone so far as to legally require grown children to visit or support their aging moms and dads. In Singapore, the law is known as the Maintenance of Parents Act.

Still, people appear to be extraordinarily altruistic, and not just within their own families. Americans in particular are famously generous, donating about $300 billion a year to charity, more than 2 percent of the nation’s GDP. Just think back to the last hurricane or earthquake that killed a lot of people, and recall how Good Samaritans rushed forward with their money and time.

But why?

Economists have traditionally assumed that the typical person makes rational decisions in line with his own self- interest. So why should this rational fellow — Homo economicus, he is usually called — give away some of his hard- earned cash to someone he doesn’t know in a place he can’t pronounce in return for nothing more than a warm, fuzzy glow?

Building on Gary Becker’s work, a new generation of economists decided it was time to understand altruism in the world at large. But how? How can we know whether an act is altruistic or self- serving? If you help rebuild a neighbor’s barn, is it because you’re a moral person or because you know your own barn might burn down someday? When a donor gives millions to his alma mater, is it because he cares about the pursuit of knowledge or because he gets his name plastered on the football stadium?

Sorting out such things in the real world is extremely hard. While it is easy to observe actions, it is much harder to understand the intentions behind an action.

Laboratory experiments are of course a pillar of the physical sciences and have been since Galileo Galilei rolled a bronze ball down a length of wooden molding to test his theory of acceleration. Economists, however, have never been as reliant on the lab. Most of the problems they traditionally worry about — the effect of tax increases, for instance, or the causes of inflation — are difficult to capture there. But over time, some economists came to believe that if the lab could unravel the scientific mysteries of the universe, surely it could help figure out something as benign as altruism.

These new experiments typically took the form of a game, run by college professors and played by their students. One was called Dictator. In this game, a small pool of money is divided between two people, but only one of them gets to decide how the money is divided. (Thus the name: the “dictator” is the only player who matters.)

The original Dictator experiment went like this. Annika was given $20 and told she could split the money with some anonymous Zelda in one of two ways: (1) right down the middle, with each person getting $10; or (2) with Annika keeping $18 and giving Zelda just $2.

Dictator was brilliant in its simplicity. As a one- shot game between two anonymous parties, it seemed to strip out all the complicating factors of real-world altruism. Generosity could not be rewarded, nor could selfishness be punished, because the second player (the one who wasn’t the dictator) had no recourse to punish the dictator if the dictator acted selfishly. The anonymity, meanwhile, eliminated what ever personal feeling the donor might have for the recipient. The typical American, for instance, is bound to feel different toward the victims of Hurricane Katrina than the victims of a Chinese earthquake or an African drought. She is also likely to feel different about a hurricane victim and an AIDS victim.

So the Dictator game seemed to go straight to the core of our altruistic impulse. How would you play it? Imagine that you’re the dictator, faced with the choice of giving away half of your $20 or giving just $2.

The odds are you would . . . divide the money evenly. That’s what three of every four participants did in the first Dictator experiments. Amazing!

Dictator yielded such compelling results that the games soon caught fire in the academic community. They were conducted hundreds of times in myriad versions and settings, by economists as well as psychologists, sociologists, and anthropologists. As it turns out, it didn’t matter if the experiment was run in western Mongolia or the South Side of Chicago: people gave. By now the game was usually configured so that the dictator could give any amount (from $0 to $20), rather than being limited to the original two options ($2 or $10). Under this construct, people gave on average about $4, or 20 percent of their money.

The message couldn’t have been much clearer: human beings indeed seemed to be hardwired for altruism. Not only was this conclusion uplifting, but it rocked the very foundation of traditional economics.

Non-economists could be forgiven if they felt like crowing with satisfaction. Homo economicus, that hyper- rational, self- interested creature that dismal scientists had embraced since the beginning of time, was dead (if he ever really existed). Hallelujah!

If this new paradigm — Homo altruisticus? — was bad news for traditional economists, it looked good to nearly everyone else. The philanthropy and disaster- relief sectors in particular had reason to cheer. But there were far broader implications. Anyone from a high government official down to a parent hoping to raise civic- minded children had to gain inspiration from the Dictator findings — for if people are innately altruistic, then society should be able to rely on its altruism to solve even the most vexing problems.

One of the most prolific experimental economists among the new generation was a native of Sun Prairie, Wisconsin, named John List. In 2005, thanks largely to his experience with field experiments, he was offered a tenured professor position at the University of Chicago. By now he knew the literature on altruism experiments as well as anyone. And, as someone who grew up in a family of truck drivers, he knew the real world a bit better. List set out to definitively determine if people are altruistic by nature.

His weapon of choice was Dictator, the same tool that created the conventional wisdom. But List had a few modifications up his sleeve. This meant recruiting a whole bunch of student volunteers and running a few different versions of the experiment.

He began with classic Dictator. The first player (whom we’ll call Annika once again) was given some cash and had to decide whether to give none, some, or even all of it to some anonymous Zelda. List found that 70 percent of the Annikas gave some money to Zelda, and the average “donation” was about 25 percent of the total. This result was perfectly in line with the typical Dictator findings, and perfectly consistent with altruism.

In the second version, List gave Annika another option: she could still give Zelda any amount of her money but, if she preferred, she could instead take $1 from Zelda. If the dictators were altruistic, this tweak to the game shouldn’t matter at all; it should only affect the people who otherwise would have given nothing. All List did was expand the dictator’s “choice set” in a way that was irrelevant for all but the stingiest of players.

But only 35 percent of the Annikas in this modified, steal- a-dollar-if-you-want version gave any money to Zelda. That was just half the number who gave in the original Dictator. Nearly 45 percent, meanwhile, didn’t give a penny, while the remaining 20 percent took a dollar from Zelda.

Hey, what happened to all the altruism?

But List didn’t stop there. In the third version, Annika was told that Zelda had been given the same amount of money that she, Annika, was given. And Annika could steal Zelda’s entire payment — or, if she preferred, she could give Zelda any portion of her own money.

What happened? Now only 10 percent of the Annikas gave Zelda any money, while more than 60 percent of the Annikas took from Zelda. More than 40 percent of the Annikas took all of Zelda’s money. Under List’s guidance, a band of altruists had suddenly — and quite easily — been turned into a gang of thieves.

The fourth and final version of List’s experiment was identical to the third — the dictator could steal the other player’s entire pile of money — but with one simple twist. Instead of being handed some money to play the game, as is standard in such lab experiments, Annika and Zelda first had to work for it. (List needed some envelopes stuffed for another experiment, and with limited research funds he was killing two birds with one stone.)

After they worked, it was time to play. Annika still had the option of taking all of Zelda’s money, as more than 60 percent of the Annikas did in the previous version. But now, with both players having earned their money, only 28 percent of the Annikas took from Zelda. Fully two-thirds of the Annikas neither gave nor took a penny.

So what had John List done, and what does it mean?

He upended the conventional wisdom on altruism by introducing new elements to a clever lab experiment to make it look a bit more like the real world. If your only option in the lab is to give away some money, you probably will. But in the real world, that is rarely your only option. The final version of his experiment, with the envelope-stuffing, was perhaps most compelling. It suggests that when a person come
s into some money honestly and believes that another person has done the same, she neither gives away what she earned nor takes what doesn’t belong to her.

But what about all the prizewinning behavioral economists who had identified altruism in the wild?

“I think it’s pretty clear that most people are misinterpreting their data,” List says. “To me, these experiments put the knife in it. It’s certainly not altruism we’ve been seeing.”

List had painstakingly worked his way into the center of an elite group of scholars who were rewriting the rules of economic behavior. Now, in order to stay true to his scientific principles, he had to betray them. As word of his findings began to trickle out, he suddenly became, as he puts it, “clearly the most hated guy in the field.”

When you look at the world through the eyes of an economist like John

List, you realize that many seemingly altruistic acts no longer seem so altruistic.

It may appear altruistic when you donate $100 to your local public radio station, but in exchange you get a year of guilt- free listening (and, if you’re lucky, a canvas tote bag). U.S. citizens are easily the world’s leaders in per-capita charitable contributions, but the U.S. tax code is among the most generous in allowing deductions for those contributions.

Most giving is, as economists call it, impure altruism or warm-glow altruism. You give not only because you want to help but because it makes you look good, or feel good, or perhaps feel less bad.

Consider the panhandler. Gary Becker once wrote that most people who give money to panhandlers do so only because “the unpleasant appearance or persuasive appeal of beggars makes them feel uncomfortable or guilty.” That’s why people often cross the street to avoid a panhandler but rarely cross over to visit one.

And what about U.S. organ-donation policy, based on its unyielding belief that altruism will satisfy the demand for organs — how has that worked out?

Not so well. There are currently 80,000 people in the United States on a waiting list for a new kidney, but only some 16,000 transplants will be performed this year. This gap grows larger every year. More than 50,000 people on the list have died over the past twenty years, with at least 13,000 more falling off the list as they became too ill to have the operation.

If altruism were the answer, this demand for kidneys would have been met by a ready supply of donors. But it hasn’t been. This has led some people — including, not surprisingly, Gary Becker — to call for a well-regulated market in human organs, whereby a person who surrenders an organ would be compensated in cash, a college scholarship, a tax break, or some other form. This proposal has so far been greeted with widespread repugnance and seems for now politically untenable.

Iran established a similar market nearly thirty years ago. Although this market has its flaws, anyone in Iran needing a kidney transplant does not have to go on a waiting list. The demand for transplantable kidneys is being fully met. The average American may not consider Iran the most forward- thinking nation in the world, but surely some credit should go to the only country that has recognized altruism for what it is — and, importantly, what it’s not.

If John List’s research proves anything, it’s that a question like “Are people innately altruistic?” is the wrong kind of question to ask. People aren’t “good” or “bad.” People are people, and they respond to incentives. They can nearly always be manipulated — for good or ill — if only you find the right levers.

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2 thoughts on “A review of SuperFreakonomics (Penguin Australia, 2009)
  1. Alex

    “n) Circumsicion as a part of the ‘solution’ to HIV/AIDS
    “circumcision was found to reduce the risk of HIV transmission by as much as 60 percent in heterosexual men”. (p.208)”

    This claim has been thoroughly debunked by persons far more qualified than myself. I really enjoyed reading both of these books but am slightly dismayed that they didn’t take the time and effort to dig further into the research for this claim. Although both of them have confessed that neither are good at math, that’s hardly an excuse.

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