Intro. [Recording date: October 21, 2020.]
Russ Roberts: Today is October 21st, 2020. I want to remind listeners, you can get your EconTalk merchandise at russroberts.info, where I archive all my work. So, feel free to look around if you go there.
My guest today is Steven Levitt. He is the William B. Ogden Distinguished Service Professor of Economics, the winner of the John Bates Clark Medal in 2004–a prize for the best economist under the age of 40. And, with Stephen Dubner, he is the author of the book Freakonomics, and the creators of all things Freakonomic. Steve, welcome to EconTalk.
Steven Levitt: Good to be here, Russ. Thanks.
Russ Roberts: Let’s start with the Freakonomics phenomenon. Why do you think your book caught fire?
Steven Levitt: Mostly luck, honestly. I think we were in the right time–the right place at the right time. In some sense, I think what made it different from many other economics books is that Dubner is a real journalist, and he can write like almost nobody else can. And, I think the particular nature of the kind of studies that I’ve done academically, tend to lend themselves to storytelling. And, so, I think we wrote an entertaining, informational, educational book.
But, really, you can’t really attribute it to anything other than luck that certain things happened. Like, I happened to go on the Daily Show with Jon Stewart, and he made me seem like a hero. And, so, a lot of young people started picking up books. So, it was a lot of happenstance. It’s good. I mean, no complaints on my side, that’s for sure.
Russ Roberts: Well, I have a complaint because for about five years when I’d tell somebody I was an economist, they’d say, ‘Have you read Freakonomics? What do you think of it?’ Unfortunately for you, that question has become less frequent. But, it was frequent enough. You did do extremely well. And I think you really–I didn’t realize this; I don’t know if it’s true. I’d like your reaction. I think you were very early on, you and Dubner, in the popularizing book that takes a bunch of social science studies and reveals them for the listener, the reader. I think you were Malcolm Gladwell before Gladwell.
Steven Levitt: No, Gladwell was before us because when we first thought about writing the book, Steven Dubner said, ‘Hey, read this book by Malcolm Gladwell.’ And, I read Gladwell’s book; and it was surprising to me, because I hadn’t thought about that as a book. I’d thought about writing books before, but they’d never been so popularizing or so journalistic. And so, indeed, Gladwell was there before us. And, indeed, to thank Gladwell for what he did to help us. I mean, his blurb on the front of our book, I’m sure had a huge impact on our success, as well.
Russ Roberts: Yeah, that might be hard to test. I’ve always wondered whether blurbs–blurbs are fun. I don’t know whether they work or not. Obviously, publishers think they do.
What was the reaction from your colleagues in the profession? You know, I have a similar route. I’m not as successful as you are, but I’ve popularized a lot of economics. And, in the early days–and your book was in the early days, somewhat, of that–it was considered somewhat untoward to, quote, “waste your time speaking to a popular audience.” And, Chicago was a particularly–having been a student there, it’s a particularly snobby place with a high regard for the academic life. Did you take flack for the book?
Steven Levitt: Not as much as you might think, actually. I think my colleagues already held me in such low regard that I couldn’t really push myself any further. I mean, because I’ve always been–I’m kind of joking about that. My colleagues, I think they like me okay. But, I’m different. They treat me as different, like I’m held to a different standard. And, they had come to expect just about anything from me, so I think they weren’t so surprised.
I mean, it wasn’t–you know, ultimately, it was interesting. So, the book got popular, and it made so much sense to teach a course, like a Freakonomics course, to the undergrads. It would have had a huge enrollment. And, the Chair at the time, came into my office and said, ‘Hey, just so you know: You are not going to teach a Freakonomics undergrad course.’ And, I said, ‘Why not?’ And, he said, ‘Well, for starters, I’m not going to have you profit from selling your book to the students.’ And, I said to him, ‘I mean, just being honest, I make a dollar a copy from the paperback, and we’ve already sold 6 million copies. So, if you want me to donate the $100–if the thing that’s keeping us from giving our students what they want is the $100 I’m going to earn in royalties, I would be happy to donate to the Department.’
But, I think it was part of a broader view that this was kind of fun, but a Chicago view that, like, economics is serious, and this wasn’t serious enough.
Look, I think there are many reactions to the book. One very common reaction is, ‘Look, I’m a better economist than Levitt, so if I write a book, I’m going to sell, like, 10 million copies.’ So, I think there are a lot of people who have written books that wouldn’t have, otherwise. A lot of people got into pretty big advances on books, as well.
Russ Roberts: That’s probably true.
Steven Levitt: And I think a lot of–another set of people have said, ‘Look, I don’t really like Freakonomics, but the fact is, a lot of people, a lot of kids read the book. And, it led some of them to be economics majors. And, the supply of economics faculty is pretty limited in the short run, and the demand for our product went up. So, maybe Levitt’s not so bad, after all.’ You know, so–
Russ Roberts: You said your colleagues see you as different. How are you different?
Steven Levitt: Well, the way in which I am different–I don’t know if that’s how my colleagues see me–is I’m somehow not really an economist in the usual sense of the word. Obviously, I’ve studied economics. I know basic economics, but I’m really always been more driven by data. And, by almost–I don’t know, sociological–it’s the wrong word. Not sociological in the sense of the discipline of sociology, but sociological in the sense of very interested in society and culture, in a way that many economists haven’t been really.
And I know Gary Becker was your advisor. So, very much in the spirit of Becker, although the tools I’ve used have been very different. And, so, I’ve just never been that interested in economic systems, as much as I have been in using economic tools to study questions that are further afield than what–you know, I’m really at the edges. Almost everything I’ve done, you could look at and question whether it’s economics or not.
Russ Roberts: Yeah. That’s a fascinating way to think about it. I want to go back to your conversation with the Chair about the undergraduate class. Two things come to mind. One is, Robert Frank has taught that class for a long time [at Cornell University–Econlib Ed.]. He doesn’t teach it the way you do, but his idea of the economic naturalist, the idea that economics is about going into the world and finding puzzles, and thinking about how understanding incentives or markets might help us get a better grasp of what’s really going on, is a beautiful idea. It’s also the same–the essence, when I went to Chicago, when I showed up in 1976–that was a huge part of the Core Exam, was tricky puzzles, like why are women’s dry cleaning costs higher than men’s? And, to see whether you could craft a narrative around it.
What’s different about what you’ve done is–as you just confessed–you’re not so interested in crafting the economic narrative, I would say, outside of incentives matter. Which obviously, is a crucial part of economics–not the whole thing. But, that you wanted to bring data to bear on these questions in a way that many economists hadn’t before. Is that a fair summary?
Steven Levitt: Yeah. I think what–absolutely. I think I’ve always been driven by puzzles, and with the caveat that–look, I’m in an economics department, so I’ve always asked myself, ‘Are these puzzles that relate to economics?’ And, so, I’ve tried to really constrain myself to puzzles that relate to economics. But, you’re right. Incentives have obviously been a huge part of what I’ve thought about. And, externalities, I think, have been present in a lot of what I’ve thought about.
It’s interesting because a lot of people call me a Behavioral Economist, but I’m not really. I mean, I’ve done very little that fits into Behavioral Economics, with a capital ‘B.’ Going back to Becker–Becker and I used to joke that he was a behavioral economist, with a lowercase ‘B.’ Like, he was just interested in behavior. And, I think that’s the same kind of thing with me. I’m interested in behavior, but rarely have I actually used many of the tools that Behavioral Economists have exploited.
Russ Roberts: Well, we’re all behavioral economists now, but with a lower case ‘b’ and ‘e.’
In fact, in a recent conversation you had with Dubner on your podcast–and we’ll talk about your podcast in a little bit–but you suggested that the impact of Behavioral Economics, at least in the capital ‘B’ sense–meaning nudging and taking advantage of maybe what people see as irrationality, has not been very effective: that the magnitudes are small. You want to talk about that?
Steven Levitt: Yeah. I just think empirically. So, a lot of the basis for Behavioral Economics has come out of laboratory experiments. And, in laboratory experiments, you often can generate really big impacts on behavior and what people do.
In the real world, when we’ve gone out and tried to do nudges of various kinds, with the clear exception of defaults–which are enormously powerful, that if you just, like, sign people up for retirement savings, that’s an incredibly big impact–
Russ Roberts: Opt-out versus opt-in–
Steven Levitt: Yeah, exactly. All that’s really big. But most of the stuff that people have tried to exploit–and others might disagree, but my empirical experience with loss aversion and with trying to use subtle framing effects–many haven’t yielded very much in terms of empirical results. I mean, I think there’s a lot of evidence that you can use, you know, social shaming and stuff like that, in letters about paying your taxes, or about energy usage, by a couple percent. But it’s no miracle.
And I think Behavioral Economics is really interesting. I think there’s no getting around the fact that it is fascinating, and it intrigues many people; and it is enticing. So, when I talk to companies, almost every company I talk to approaches me and they say, ‘We would love to use the tricks and insights of Behavioral Economics to revolutionize what we do.’ And, I’m [inaudible 00:11:50], ‘Look, I’ll try to help you with that.’
But, honestly, I think oftentimes that the tricks and the miracles of regular economics are a better place to start, because there’s often a lot more power in just getting the incentives right, and getting prices right. It’s incredibly powerful in many cases.
Russ Roberts: What I love about your approach is that you understand that incentives aren’t just monetary incentives. I think a lot of people use our mantra of ‘incentives matter’ in a straw-man version, and say, ‘Well, this price change, people didn’t change,’ or whatever. Forgetting the fact that, of course, prices and monetary incentives take place in a social setting where norms, guilt, shame, reputation matter. And, it’s only bad economists who think it’s all money.
Steven Levitt: You said that, not me. But, I agree.
Look, it’s almost reductio ad absurdum when you say ‘incentives.’ The way I use the word ‘incentives,’ I use it to cover everything. But, I think it’s not reductio ad absurdum, because it’s actually right. It’s actually true that there are social incentives. And, then there’s also kind of moral incentives. And, so given that kind of, those three things–financial, moral, and social incentives–essentially cover more or less the universe of things that lead people who are paying attention, to do the things they do.
And so, look, I think that–what I loved about Nudge in particular, and I may be getting off track. But what I thought was interesting about Nudge is that, until I talked to Thaler about what he was doing, even before I wrote the book, I had always thought of our toolkit as economists, essentially–you know, you could try to do incentives; or you could pass a law and use, like, prohibitions, or various ways. But, Thaler’s insight, I thought was a really good one. Which is: a lot of times, it’s just easier to trick people into doing what you want them to do than to actually either, like, educate them, use information, or to change incentives.
And that’s actually a really important insight. Because–especially when the time that you and I were being educated in economics, a lot of the stuff was full information, complete information. We assumed that people were paying attention and they were doing a good job at things. Not that they were necessarily perfect, but that they were at least thinking about stuff.
And, I think Thaler’s insight is that people are busy and they’re not even thinking about stuff: So, just trick them. Do it when they’re not looking, and you can get relatively big impacts.
Which, you know, I think–you have to–ethically, you’ve got to worry a little bit about that, because is it really the right thing to do?
But, I think in terms of actually getting stuff done, I now have that kind of at the top of my toolkit. If I want to get something done, I think, ‘How can I trick people? How can I just get something done by changing it without anybody noticing?’
And I think–you know, there aren’t that many things where I think I’m smarter than, where I think I know better than everybody else, and where I actually want to impose my will on people. But, in those cases, look, I think the nudge approach is really, really genius.
Russ Roberts: The only thing that I think I know better than other people is that I don’t know much more than anybody else.
But, I don’t agree with that, that tricking part. And, I’ll let you defend it in a second.
I think–it’s interesting: I was trained that you can’t trick anybody. People are rational–this is the full-information, extreme version that you gave. That’s always been my starting point, as an economic naturalist. Doesn’t mean it’s my ending point, but I always start with: I’d rather have a theory that people aren’t stupid–I’d rather avoid the theory that people are stupid, or they make this mistake systematically, or they make it over and over again, it’s not in their self-interest.
And, so, I’ve changed. I do know that people do get tricked now and then. But I think it’s hard to trick people. And, I think what markets do is make it harder to trick people. The incentives that emerge out of markets are going to protect people from exploitation. It’s true, they can still pay a stupid price if they ignore the market opportunities. But, I’m much less–I’m not as pure as I used to be, but I haven’t gotten nearly as far as you suggest. And you just told me, though, that doesn’t work very well. So, wait, wait, wait: so, defend your idea we can trick people.
Steven Levitt: Sure. Okay, so first–
Russ Roberts: Maybe give us an example–
Steven Levitt: I’m not actually saying, taking advantage of people that are stupid.
Okay, so I agree. I’m in basic agreement with what you said, that for sure, markets are an enforcement mechanism that keeps exploitation under–within limits. Okay. So, in particular, I’m not really thinking about market settings as I talk about this.
The second thing is that I’m not thinking about people making mistakes and being stupid. I’m actually thinking more about inattention–
Russ Roberts: Interesting–
Steven Levitt: I think Thaler’s real insight is that inattention is really important, because it doesn’t actually make sense for people like you and me to fumble around, around the edges of exactly what’s in our food, or is one shaving cream doing some particular thing different?
So, I think there’s a lot of things where we just kind of assume that–I think you and I both assume that markets are going to take care of stuff. And, so, we don’t worry about a lot of it.
But, I was more thinking about cases where we’re not really in markets, but instead we’re relying somehow on–going back to the classic case, which is for retirement. So, we take a job. We don’t know anything in particular about retirement savings, but there’s someone in HR [Human Resources] and that person’s a real expert. Right? They’ve spent their life going to seminars and studying retirement. And, so, when they tell me that I should do this, I’m like, ‘Huh? Okay.’ And, then honestly, I never look at it again. And, so, it’s not really that I’m necessarily–you know, it’s not that I’m thinking about it, not that I’m stupid. It’s just that I’ve ceded control because life is complicated.
And, I think we do it a lot with the medical profession, too, often to our detriment. Where, if you just listen to doctors, you end up doing crazy things.
And so, I’ll give you an example. Well, I was thinking, I mean, I’ve got so many examples of the medical profession, I probably shouldn’t even go there, because they’re the kind of things you’ll have to censor out afterwards.
But, that’s what I really mean: just that the world is complicated and that when there’s opportunity cost, people aren’t paying much attention. And, so, around the edges.
But, look, on fundamental things, I agree with you completely, that markets are really the best insurance we have, protection against exploitation. Which is kind of the opposite of what–how many people think of markets.
Russ Roberts: Yeah. I just read an article by Canadian journalist David Cayley about the pandemic. I’m just going to digress on this and we’ll come back in second, to our main theme. But, it’s talking about the pandemic. And the way I would summarize–I hope you and I’ll talk about that, the pandemic in particular, in a little bit. But, he talks about how, the way I would phrase it: We’ve been trusting scientists, but not science. That, there’s so much uncertainty around the pandemic. And, the voice of science–scientists–are very loud. And people go, ‘Well, they’re scientists, so I guess they’re talking science.’
But, of course, in many cases, there’s a lot of uncertainty around what they’re saying. And, in fact, sometimes they’re just simply wrong. The other question would then be, ‘And, which scientists?’ There’s scientists on both sides, saying some really bizarre, opposite things.
And, I think it taps into a deeper, cultural question you’re raising there, which is: For most of our lives, that you and I have been alive, we trusted experts. We just said, ‘Well, that person in HR, that’s their field. I don’t need to look into this. I’ll just trust them.’
And, we’re living in a time now, where–we’ve had Yuval Levin on the program talking about this, and Martin Gurri: Expertise is dying. It’s been betrayed to some extent by the practitioners. It’s also been overwhelmed by the information tsunami that we’re surrounded by, as Gurri calls it.
And, so, everything is kind of up for grabs now. It’s interesting to think about how policy, and nudging, and incentives are going to work in a world where people are really skeptical about what–people they used to trust, what they actually know.
Steven Levitt: Yeah. No, I agree. Let’s go back to medicine, for a second. If you are diagnosed with some relatively rare thing, you can know more about that malady than your general practitioner-doctor, in about a day. A day of really hard study about something, and you know a lot about it. Which is the beauty. I mean, it’s the wonder and the amazing value of the Internet, is how available information has become and how it can be used to help individuals who are seeking information.
So, I actually, so, while I agree with you that it is sad that in many cases, expertise has been politicized or distorted. I’m not sure that wouldn’t have been true in the past. I mean, I can go back. I’ll give you another example.
So, after our second book, SuperFreakonomics, came out, and we wrote about climate change. And, what was interesting, going back to the idea of scientists: so there’s something called, I think it’s called the Union of Concerned Scientists or something like that. Which is a group–and, as far as I could tell, there were no scientists involved in the critique of what we were saying about climate change. It was purely a propaganda exercise to try to discredit us. But because they were called the Union of Concerned Scientists, they were treated with the dignity of science. And, everyone seemed to ignore the fact that the articles we were citing–I mean, we weren’t doing our own research. We were citing articles that had been in Nature and Science, and these were by top scientists in the area.
But, I will say, that was a case where, by used strategically–in exactly the thing I think that you’re speaking against–like, the strategic use of the reputation of science to destroy things that the people who are arguing want destroyed, regardless of truth, regardless of right and wrong, was used incredibly effectively. I mean, I’ve never lost a debate the way I lost the debate to the environmentalists.
And honestly, partly I regret–we wrote it really poorly. The way we wrote about it kind of triggered people to be very against it. I think of all the things I’ve ever argued, I’ve never been more right about anything than what we said about climate change: which is that it was going to keep on going and all of the cries that everyone should just ‘do the right thing,’ were not going to work. I mean, as economists, we all know that just asking people to do the right thing, when the benefits accrue to other people, it never really works. And, that, if we’re going to have a solution, it’s probably going to be a technological solution.
And, actually what’s interesting is that the entire–the whole world has moved in that direction in the last 10 years. I mean, I think we’ve come to agree more and more that’s true, even environmentalists.
But, for a long time, people have been using science as a weapon to control[?] things they don’t like, even when it has little to do with science.
Russ Roberts: Yeah. It’s a cudgel. It reminds me of when I was once interviewed by a reporter on some issue related to international trade, and in the middle of the interview, the reporter had a moment of unease and said, ‘Wait a minute. You are an expert, aren’t you?’ And I thought, ‘How do I answer that question?’ I thought, ‘Do I claim I’m an–?’ And then I said, ‘Well, I’ve written a book on international trade.’ ‘Oh, okay.’ She was totally reassured–because that made me an expert, even though it was mainly a popularizing book of the ideas of comparative advantage. And it was not what I would call research. But she was reassured because she could then put Roberts, the author of–she’s okay.
Thinking about–you mentioned medicine and our ability to have knowledge. It’s such a tragic example to me of where the incentives and feedback loops that would normally protect consumers from egregious over-diagnosis and over-testing other things. The benefits typically accrue to the doctor. Sometimes to the patient, but sometimes not so much, with side effects and negative outcomes, sometimes with those tests. And yet, I think emotionally, we have a trust of that person as a quote “scientist”–a doctor. That–it’s being eroded through the Internet and other bad behavior. But, those incentives there really, I think, play into it a lot.
Steven Levitt: Yeah. I mean, one of the things we’ve written about is about chemotherapy and how much chemotherapy is relatively ineffective, has enormous side effects–
Russ Roberts: Tragic. Incredibly expensive.
Steven Levitt: and the crazy incentive system whereby doctors get part of the revenue that is generated from the sale of those. I mean, it’s really, it’s a crazy system. I think if people knew more about it, I don’t think they’d be very open to that system.
Russ Roberts: The way I see it–which is so depressing–it’s a way that, often, the doctor is reaching into the taxpayer pocket.
The taxpayer is not in the room, right? The Medicare payment, unnegotiated price set by the pharmaceutical company for an extra two months of life, instead of using the existing treatment, which is a fraction of the cost is, is–it’s a bad system. It’s going to be hard to fix, but it’s a bad system. On EconTalk and on your podcast we’re trying to spread a little education.
You’re spreading a little more than I am because the size of your audience, but we’re all trying to do our part. And it’s hard because the–and plus, the invested interests are extremely tough.
Going back to our old thread: Did you teach that undergraduate class after that incredibly generous offer to share the royalties from a hundred copies with the Department?
Steven Levitt: No, I’ve never taught a course on Freakonomics. With John List we did eventually teach a course of economics for non economics majors, at the University of Chicago. And, I think the view is that everyone should have one economics course. We’ve never been part of the core economics. We’ve chosen not to be part of the Core first-year classes.
And, I’m probably not even supposed to say this, but I’ll say it anyway; I’ll let it out. So, they changed the incentives at the University so that, to the Department, there was a benefit from having more students take our courses. We started getting paid on the margin.
So, when that happened, John and I said, ‘Well, why don’t we teach a course that will be really popular among non-economists?’ And so, we did that. I think the first year we had something like 500 students signed up for it. Which turned out to be worth a lot to the Department, and a really fun course to teach because John’s a good friend of mine. And we just tried to–we both believe in the ideas of economics of being really powerful. And, I think our own profession has a little bit gotten lost in technicality and in–in folks and things that are hard, and liking things that are hard.
But, the basic idea–I mean, you–no one more than you has been, kind of been, focused on the basic ideas of economics and how to bring, whether it’s competitive advantage or incentives or, you know, how effective prices can be at solving problems.
So, we–it was really fun. So, we have been teaching this course now for four or five years. And in that course we do give–I give away PDF versions of Freakonomics for free. And John gives away free versions of his book, as well. But, it’s not really a Freakonomics course in the sense that where it’s really–and sometimes more economics and Freakonomics, because it’s really trying to teach what we think are the 10 or 12 core ideas of economics but without any math, simply taught as like these are powerful ideas, and you should have them in your toolkit as you approach life.
Russ Roberts: Yeah. I’m relieved that it’s more than 100. When you said you were going to give the 100, I thought maybe there’d be 1,000 students. So, 500 is not too bad.
Steven Levitt: I’ll tell you about the 100 or so. The reason I said 100 students is that for the most part, when we were doing in-person learning, the limit on class size was determined by classrooms. And the biggest classrooms that are easily available to the Econ department in Chicago are about 80 to 100 seats in them. And so, so it’s always been really frustrating to me that there are many students who want take my course. I teach a course on economics of crime, which is quite popular, and I have to limit it every year. And so, one year I pushed harder, and there’s actually one or two huge rooms, and I got access to one of those huge rooms, and I had, you know, 300 students in the class.
And the same chairman who didn’t want me to teach Freakonomics, the next year came around, and I saw that I had been reassigned to an 80-person classroom. And, I went to him, and I said, ‘Hey, this doesn’t really make sense. We’ve got 300 students who want to take the class.’ And, he said, ‘Well, the problem is all the other faculty members got really upset because there were hardly any students in their classes, and they complained so much that I’m going to lower you back down to 80 again.’–
Russ Roberts: Socialist–
Steven Levitt: And, I said, ‘This is the University of Chicago Department of Economics, and our solution is to not let people have what they want? Shouldn’t the teachers try to teach something that students want to go to?’
I mean, like, it was–I’ve had about maybe three or four of those defining moments where everything I believe about Chicago economics is turned on its head in the actual practice of life by Chicago economists–who are great in their papers at acting like Chicago economists, but awful in real life. Can I give you another example while we are on this?
Russ Roberts: Sure.
Steven Levitt: We were thinking about of really–
Russ Roberts: You have tenure, right?
Steven Levitt: I have tenure. Yup.
And, we have a really fantastic guy who was coming up, who is young, but was coming up, getting outside-tenure offers, potentially. So, we had a senior faculty meeting. And so, we decided to vote him–unanimously, with almost no discussion–to give him an untenured associate position. And, the problem was that it was clear that other places were going to make him tenured offers, and it was also clear to me that if other places made him tenured offers first and we only responded, it would hurt our bargaining position in convincing him to stay relative to preempting those offers.
So, I said, ‘Hey, let me just ask you.’ Like, if he didn’t do any other work in three years, ‘Do you not think that this body of work he’s already done would be good enough for tenure?’ And, like, basically everyone agreed.
And, I said, ‘So, just trying to do backward induction, in three years we’re going to vote him tenure even if he does nothing in between. Does that not mean we shouldn’t vote him tenure now?’
And perhaps the world’s greatest, rational, economics macro-economist said, ‘He’s not ready for tenure.’ And, that was the end of the discussion. He’s not ready for tenure. Even though backward induction told you that he would, with 100% probability, would be ready for tenure in three years.
I’m not even sure what that means. But it was one of those moments I’ll never forget: Where I think, ‘How is it?–‘
It actually makes me understand why economists may be hold so little sway in policy and in the way the world works, when even in the University of Chicago Department of Economics, we make decisions that are completely at odds with any–I mean, I’ll give you another example. I’ve sat in meetings where 10 faculty members who, combined have an outside wage option of, you know, I don’t know, $15,000 an hour–have sat for an hour arguing about how to allocate $250 worth of stuff. And, at the end, I finally said, ‘Look–‘
Russ Roberts: Flip a coin–!
Steven Levitt: This is my answer to everything. ‘I’ll just write you a check for $250, and one side can have it, the other side can have it. This makes no sense. Why are we sitting here doing this?’
So, but, you know, what’s the old phrase? That people who do, do; and people who can’t do, advise? Or whatever it is.
So, anyway, that’s kind of what I feel like with some of the people in Chicago. They’re really good. They’re incredible economists, but common sense has not always been at the top of the list of Chicago economics.
Russ Roberts: Yeah. Although, market forces don’t always impinge on those small decisions. But that faculty member who you didn’t vote for, it wasn’t a free lunch.
Steven Levitt: Absolutely.
Russ Roberts: I’m sure that you paid a price for that. And it reminds me of the famous line, which I’ve never fully understood, but it seems relevant here: Why are academic fights so vicious because the stakes are so small? There’s a lot there. We’ll just leave that alone for listeners to–it’s kind of a Zen thing. We’ll leave that alone.
Before we leave Freakonomics–I want to talk about your new ventures next. But, before we leave Freakonomics, I want to take an example from the book that’s always bothered me, Steve, and I have to confess, and I’m going to give you a real life piece to it that I think will intrigue you. At least I had never heard it before.
So, this is the argument you make in the book that when a real estate agent is selling a house that she herself owns, it’s her–her name’s on the title. Versus a house where she’s representing a client and is going to get a commission. When she selling her own house, if she charges an extra $25,000 for the house, she gets the whole $25,000. If she sells the client’s house for an extra $25,000, she only gets the commission of that, which is quite small.
So, your argument is that there’s a tension, a misalignment of incentives where the agent wants to set a lower price for the house than the owner when she’s representing a client because it’ll move more quickly. And when she sells her own house, she’s going to be willing to wait a little bit longer, because she gets the whole $25,000. Is that a good summary of the argument?
Steven Levitt: Mm-hmm. Yup. That’s good.
Russ Roberts: And, you find that the data seems to suggest that, although, of course, it’s really hard to test it. You do the best you can to make some assumptions and so on.
I’ve never liked it because, in my view, going back to what we talked about before, people are relatively rational. I think most people are aware that–their agent may not share their incentives. When agents compete, they’re trying to get clients, and therefore they tend to not be able to exploit customers in that way. That’s my response.
That’s neither here nor there. We could go into the weeds of the actual study. I’m not interested in that.
But, I want to tell you about my sister said, who is a real estate agent, because I was so fascinated by it. First, she said, ‘Well, if you set too high a price for the house, it’s just not going to sell. It doesn’t matter how long you wait.’ She said, ‘It’s not that you wait longer because you get a higher price if you wait longer.’ I said, ‘Well, but isn’t there the chance that the perfect persona will come along, who falls in love with the house and will pay that premium and you just wait for it?’
She said, ‘Yeah, but that’s a terrible idea.’ I said, ‘Well, what do you think of this finding?’ And, she gave me a twist on it I’ve never heard before. She said: Oh, well, when I sell my own house, I’m a seller, and I overestimate the value of my house because I think it’s worth more than it really is. But, when I’m selling it for a client, they, too, think it’s worth more; but I can tell them, ‘No, you’re crazy.’ Whereas, when I’m selling my own house, I don’t have anybody to reel me in. To calm me down. So, I thought that was an amazing, behavioral-economics twist on the standard one. Have you ever heard that argument before?
Steven Levitt: I’ve never heard anyone say that.
Russ Roberts: That is so awesome.
Steven Levitt: It does make sense. Of course, if you go back to the Chicago version of it–well then obviously your sister, sister-in-law, she should–
Russ Roberts: Pick the right price.
Steven Levitt: She’d hire an agent then if an agent’s worth it to them. I mean, obviously if she has enough sense to know that she’s falling prey to it, again, I think it’s complicated.
Russ Roberts: Yeah, that’s true, too. Yeah. But, she can’t help herself. Because her emotional reaction, she knows it’s–and plus to admit to herself that she needs her own agent, I mean, that would be jarring.
Russ Roberts: Anyway, let’s shift gears. I want to talk about–before I do, a number of people on Twitter, I asked them what I should ask you. So, I want to ask this before we leave Freakonomics. There are a lot of interesting and dramatic and provocative and hidden phenomena that you illuminate in Freakonomics. A number of years have passed. Are there any of them that you want to say you’ve changed your mind on? you don’t think they’re true anymore? Just for the so-called record? Or do you think they’ve stood the test of time, or do you want to be agnostic about it?
Steven Levitt: You know, I think, most of the things that were research-based that I have more evidence on, I think have stood the test of time: Whether it’s campaign spending or legalized abortion or other things. I think the new evidence–I’d love to talk about the new evidence on legalized abortion. But, that’s not the answer to this question. I tell you, the two things that are just plain wrong in the book–and it’s really interesting is–there are two things that are not based on data or analysis.
So, the one was what we did on the KKK [Ku Klux Klan], and it turns out that the gentleman who had supposedly done these amazing things to infiltrate the KKK, Stetson Kennedy; and we had based that on some historical record and talking with him and whatnot.
But, after we wrote the book, somebody came to us, a historian of Florida, who said, ‘Hey, a lot of these things Stetson Kennedy said aren’t true.’ And we actually took it really seriously. We went and investigated, and we talked to him. And, he’s threatened to sue us if we–we were going to write it. So, we ended up writing a piece in the New York Times saying, ‘Look, we had relied on a bunch of sources. It turned out that it was true that somebody did infiltrate the Klan, but I think it was someone else. And Stetson Kennedy stole that person’s identity ex-post and started telling it like his own story.’
That, and the other thing is that we had a leading sociologist who swore up and down to me that he personally had met OrangeJello and LemonJello, the two African-American children whose names were spelled orange jello and Lemon jello. And, look, I would never have put an urban myth that knowingly into this thing. But, literally, this guy has studied, like, the Black Power movement, and he was completely and totally credible. I have spent a lot of time and effort–I’ve offered large prizes of financial rewards to anyone who can produce LemonJello and OrangeJello. I am completely convinced that it’s just an urban legend.
So, what’s funny is that the things that I regret now that are wrong are the things that were well-researched journalism, as opposed to actual academic research. But, I can’t think of anything of my own research that is in there that I would say, ‘No, no. Actually that’s just plain wrong.’ [More to come, 41:22]