Sunday, March 14, 2010

Freakonomics - Some Thoughts

If morality represents the way that people would like the world to work, then economics represent how it actually does work.

After a gap of 6 months, I read a book this weekend. Not knowing what exactly to read and not wanting to spend money or time on something that I would not enjoy, I scanned through the book collection of my flat mate. The advantage of this approach, I thought, was that even if at a later point I did not like the book I could safely abandon it and avoid the sunk cost fallacy - you know, that feeling of obligation to finish a bought book even when it becomes clear that you do not really like it.

So browsing through the collection I came across a book titled Freakonomics-A Rogue Economist Explores the Hidden Side of Everything by Levitt and Dubner. According to the authors, the book had "no unifying theme" and their aim was to "follow whatever freakish curiosities may occur to them". To me, who did not exactly know what he was looking for, this seemed like something that I might have been looking for. And the book did not disappoint me.

The book is an easy and interesting read. And even though it does not have an underlying theme there are some recurrent ideas throughout the book that are applied to a variety of situations. Following are some of the most stressed points in the book -

Correlation does not imply causation. This perhaps is the most prevalent logical mistake found in wide range of situations - from the suggested implications in popular advertisements to the conclusion of scientific studies. However, correlation very often hints at causation and the distinction between the two is made further difficult by the subtle nature of relationship between them. As xkcd points out - "Correlation doesn't imply causation, but it does waggle its eyebrows suggestively and gesture furtively while mouthing ‘look over there". During the course of the book, the authors make it sufficiently clear that anyone trying to look beyond the casual and conventional wisdom should be aware of this trap.

People respond to incentives. A truism of sorts. And particularly so when you define incentives in the broadest sense possible - from financial to psychological and social motivations. In defining so, an incentive just becomes an all encompassing term that can be used as a placeholder for the motivations and reasonings involved in decision making. But as some of the cases in the book demonstrate, more often than not understanding the underlying incentive scheme is crucial to understanding the behavior and interactions amongst various actors.

Conventional wisdom is often wrong. The key to understanding this is, quite unsurprisingly, understanding the underlying incentive scheme. More often than not the propagators of conventional wisdom - the experts and the media - are busy serving their own agenda which results in anything but wisdom. And when this propagated wisdom happens to resonate with the prevalent views amongst the masses, who themselves are loathe to critically examine the situation, it becomes conventional.

P.S.  A word to someone looking for a book recommendation - if you are someone who is curious to understand why the things are the way they are then you should find this book interesting.

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vnug said...

Hey -

If you liked this book ... check out "tipping point" by Malcolm Gladwell.


Sachin Tyagi said...

Thanks Vasu, will check that out once I finish the current one I am reading - "The Affluent Society" by J K Galbraith.
It's been quite good so far, though being a bit economics terminology heavy for me, it might take sometime. :)