Friday, April 13, 2012

S. Levitt, S. Dubner, Super Freakonomics, 2009

This is an amazing book in economics: “People respond to incentives, although not necessarily in ways that are predictable or manifest. Therefore, one of the most powerful laws of the universe is the law of unintended consequences.” The book touches upon a diversity of issues, which makes it really interesting: Prostitution, war on drugs, terrorism, emergency room effectiveness, apathy and altruism, response to climate change. It demonstrates economic concepts such as cumulative advantage, declared vs revealed preferences, negative externalities, price discrimination, perfect substitutes, the principal-agent problem, adverse selection, game theory, exit strategy, misaligned incentives, cream skimming, loss aversion. Although about economics, this book is sprinkled with touches on important technological and other building blocks such as object oriented programming, information management, the power of cheap and simple solutions, ideas how to stop hurricanes or global warming, geoengineering, the unstoppable power of technological innovation, letting numbers speak the truth, that in order to change the world you first have to understand it.

The gist perhaps of the book’s message is that when you behave like an economist, you tend to “make decisions based on statistical analysis rather than emotion or political considerations”.

“Instead of thinking of such stories as “economics,” it is better to see them as illustrating “the economics approach.” That’s a phrase made popular by Gary Becker, the longtime University of Chicago economist who was awarded a Nobel Prize in 1992. In his acceptance lecture, he explained that the economic approach “does not assume that the individuals are motivated solely by selfishness or gain. It is a method of analysis, not an assumption about particular motivations…Behavior is driven by a much richer set of values and preferences.”

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