you so looking around the first thing that comes to mind is somebody's charging the wrong price for this lecture because it's just we could have done a lot of money left on the table if somebody would have would have thought to raise to raise the price and it also must not much there must not be much to do in Princeton tonight the the crowd is certainly a lot bigger than the crowd the first time I came and talked at Princeton I was in my first year after I graduated from MIT and I was at the Harvard Society fellows and I had never spoken outside of Cambridge and Howard Rosenthal who was a professor in political science asked me if I'd come down and give a talk and he said come down the day before I'm going to set up a whole slate of meetings for you I know there were so many people who want to meet you in the Economics Department it's going to be a wonderful time so I took the train down the night before and I stayed at Howard's house and and in the morning he said well I had a little trouble with your schedule it's not as full as I wanted it to be and I said oh that's okay and he said I was only able to get one person to talk to you all day and so that meetings at about 11:30 otherwise you're on your own and enjoy the day in Princeton so sat alone in a room for 4-6 hours and he was nervous and building up this anticipation of my first seminar at an institution away from home and and the one professors of this one guy Ken Rogoff who's now at Harvard was very nice to me and talked to me for half an hour and otherwise I was completely alone and the time came where I've been in this room now for six hours and Howard came and knocked on the door and said it's time we got up we went to the seminar room and we were there a few minutes early and we were the first to there and the clock kind of ticked by it was now five minutes after and it was still just how a Rosenthal and myself sitting in this room and then it was ten minutes after and finally 15 and we were still alone I said listen Howard youyou already read the paper how about you and I just go get a beer and he said no no I'm sure that people are coming and about four people came in at about 20 after and we started the seminar and so I was giving my seminar and then and then about you know maybe 15 minutes later one other guy comes in and this other guy starts asking these really these really smart questions and I'm thinking you know who is this guy who was a smart guy and and I turned that she's Hank Farber who's sitting here in the front row and and and it actually made the trip very worthwhile because Hank gave me a lot of great ideas on a paper and but that the cap on the day was that after the talk we were walking out and Howard Rosenthal was talking to I guess one other faculty member and political scientist showed up and Howard Rosenthal said to him you know this other paper he has is much better than the one he presented today and that was Howard's appraisal of what had happened in the seminar and that was my first trip to Princeton so my second my second trip to Princeton is when I was on the job market and and I came and I'm gonna spare or the Ashland felt are sitting here too I'm gonna spare orly from what he's did what he did in that talk which I thought was interesting but even more interesting was that so as soon as we got them in the seminar room someone decided to turn out the lights which I thought was kind of strange and immediately almost everyone in the room went to sleep I think there was not a person in the room who did not sleep at some point and all this was fine but but Mike Rothschild ooh might even be here today but Mike ruff child was a Dean of the of the policy school and so he was there and he had brought his dog I think his dog's name was Rosie and so Rosie was much more alert than most of the faculty members and seemed to be enjoying the seminar much more so Rosie about maybe half an hour into it got up and came to the front of the room and began sniffing me okay and so everyone turned to Mike to ask him you know why he wasn't doing any buzz dog and he was sound asleep and nobody wanted to wake him up and so I eventually was able to shoo Rosie back to her her spot and the seminar seminar went on there are you know it's funny because I many you probably don't know but but I almost came to Princeton it was back back before Ben Bernanke got demoted from head of the department chairman of the department chairman of the Fed back in those days when Ben and it's funny because it's one of the few decisions in my life where I've ever been completely indifferent right every major decision I've ever had to make were to go to college so my father told me you can either go to harbor I did to pay for Harvard or the emergence of Minnesota and those were only two choices so when I got into Harvard I went to Harvard and you know in my first job there's never but it was it was it was basically essentially indifferent between Princeton and Chicago in and ended up sitting in Chicago essentially because of money that Chicago offered me more money and I was I was told by beau that I had to mention that so it would help him in his negotiations with future future faculty but but you know it's funny because I have it I have a sort of a sense of regret every time I come back to Princeton I it's a wonderful time here it's a beautiful city and and it's and it's sort of this path not taken and how how my life would have been different so it's a it's interesting to ponder that but let me stop let me stop talking about that I mean here you know it's kind of you to all come out and and you know the the kind of economics I do is not the kind of economics that most economists do it's it's asking the ridiculous questions that no self-respecting economists would be caught dead asking like whether the name you give your kid matters for their their outcomes or you know how a crack selling gang works or you know what the real estate agents are ripping you off it's it's a set of so the ones probably the sumo wrestlers you know one right it's cheating and pseudo wrestlers and with with teachers it's kind of questions that you know it's not the kind of questions that you dream about writing about when you when you enter graduate school or when you're you're growing up and so how did I come to be this this kind of economist and well it wasn't really by choice they did a survey of academic economists recently and in this survey asked what is the single most important attribute to succeed as an economist and almost well so 2% of the economists said a good working knowledge of the economy was the most important thing to be a successful economy which it says something about about our discipline almost 70% said proficiency at math was a single most important thing but my problem is that I've never been accused of being good at math by anyone and I think the story that best brings us to life is that I have recently had my 20 year high school reunion and I went back and at my high school reunion my high school calculus teacher showed up guy named mr. Drexel he was by now he must have been at least 80 because he was at least 60 when he taught me and I was very surprised to see him at my reunion and just as a cruel joke I went up to him and I introduced myself and I said I'm Steve Levitt you know you taught me calculus 20 years ago and it was sad because of course he he looked blankly at me I could see him trying to think of anything he could recollect about this mediocre student that he had taught 20 years earlier and finally I kind of like saw this light go off his light Sparkle coming to his eye and he said wait a second didn't did you get it to on the catalyst AP exam and I said as a matter of fact I did and he said that's the lowest score that any student I ever taught I remember you I remember you and and I didn't really do anything to change that in between the time I graduated from high school in the time I went back to get a PhD I took one semester of college calculus a retest me so I went to Harvard and they retest you they test you before before the first semester starts and I did so badly on the retest that I actually got placed into calculus 1a at Harvard the beginning calculus even though I'd already taken a year and that was the last math class that I ever took and so I went I went through the rest of college I worked for a few years as consultant and then I got this bright idea that I was going to go back and get a PhD in economics and I was already kind of an economist at heart and I believed in markets and my view was the faculty at MIT wouldn't let me into the the program the ph.d program if I didn't have the right preparation to succeed okay and only later when I was on the other side of the admissions task did I realize how completely crazy that that faith had been because the you know what what people decided it's just not at all clear what what the decisions are to let people in but I was optimistic and I showed up at MIT and that optimism lasted I don't know you know like 10 minutes into my first lecture as the professor scribbled up on the board these equations that were loaded with with these okay I remembered enough of calculus to know that Adi stood for a derivative that was good so I was writing in my nobody but but along the way I got this really haunting feeling because the closer when I look closely at the board if she meant either there were these two different kinds of DS floating around and I was just writing down DDD in my notebook and and I thought it was just bad penmanship and I was just going along but the more I looked at it I've always been good at pattern recognition what I realized with some of these DS the DS that went straight up and down we're in one part of the equation and the curly one throw is in a different part and I thought there might be something here I'm not and so I turned to the guy next to me and I said I said hey is there a difference between the curly D and the straight thing and he turned back to me he said you are in so much trouble and he was right I mean I wasn't so much trouble I didn't know I did not know what was going on in and and I managed to pass my classes mostly because it was too hard to fail people at MIT fail people at MIT and so they let me in so I got through the first semester and I just knew it was a bad situation and so I went back home to Minneapolis where I grew up and I pondered my faith and I had I had been a consultant and being a consultant was very hard work and I found it very unpleasant work and I really did not want to have to go back to doing that because he obviously to do would have been just to quit either just just to stop to drop out of the program but you know I I talked to my father and and my father told me a story that was intended to hurt me and this is completely true story pretty much everything I'm gonna tell you today is completely true including this story and so so my father is a doctor he's a medical researcher and he said you know when I was just getting started in medical research I was in the same situation you were in he said my my mentor a guy who named Franz Engle finger who ended up being later the the editor of the New England Journal of Medicine was my father's mentor when he was doing a fellowship and he said Ingo finger pulled me aside one day and he said Levitt you don't have much talent for medical research and my father kind of shrugged his shoulders and then this guy the mentor went on to say but there's one area of medicine that's so devoid of research that even some of your limited talents might be able to make a difference so my father said well what what area is that and the guy said intestinal gas so my father actually took this advice to heart and he has devoted his entire career to the study of intestinal gas he's the world's foremost expert in intestinal gas and indeed when I was in high school when I was in high school GQ did a profile of my father and the headline was the king of farts ok so my dad's advice was just figure out what it is in economics that everybody is interested in but all the other researchers are too embarrassed to study it and that's how you're going to find your way in economics and I think my father's proud of me I think that's exactly what I've managed to do is to sort of replicate his success as the king of farts with with with free economics it's like the Apple I did not did not fall far from the tree so so let me let me just tell you a couple stories I want to leave some time for for questions as well a couple stories of some new research that I'm doing so one of the you know one of the perks of writing a book that sells a lot of copies especially in this case somebody decided it was a business book right so if you've read it there's nothing about business the closest thing to business in this book is about how how crack gangs look like McDonald's right and so but somehow somebody decided this was a business book and and the greatest thing about writing a best-selling business book is suddenly every CEO thinks that he needs you to come in and and give give him advice or her advice and so I get a lot of calls and they say what do you charge for consulting and I say actually I do it for free because if you're willing to give me data to write academic papers and the project is interesting I'll do it for free and when the CEO is here my price there I was very eager to go forward with with the with this deal and so I able to talk with a number of companies and and what's what's interesting is how ill-suited I am for actually advising companies because if you think about the way it took me a while to come out and to understand this about what the difference was between business and academics in in academics to succeed you have to be utterly convincing right so they did a good academic paper basically takes the hypothesis and proves it beyond any reasonable doubts that no critic can say that there's some other hypothesis to explain it okay in order to do that you have to usually bite off little tiny questions that aren't as interesting as the fundamental question you'd really like to answer right so so I would really like to know how to cut government corruption and I end up writing about sumo wrestlers okay because that's what I can be convincing on but in business it turns out two totally different it took I don't know why it took me so long to recognize it but business basically what you need to is to do the answer the important questions and there is no critic there you only have to answer them halfway well and if you can even only person you have to continue they have to convince no want to convince your boss and so there's a very different standard now what's interesting is somewhat counter-intuitively I think as I reflected on it to be totally convincing you have to be very simple right so it's something that's complex is almost never convincing to a large group of people so I can build a complicated model with twenty variables and calibrated and it might be right but but there's always someone who said well the assumption you made on variable 14 was a bad assumption and so it's Ivan always tried to adopt the simplest possible ways to answer questions that I can and what's funny is in business that's not really the view of the world and so what's interesting when I go to a big company is invariably what they'll do is they'll show me some very fancy thing they developed like I was at a big electronics retailer and and they they brought me in and and they said we want to show you this we got this fantastic report done by an outside consultant it cost us $500,000 and we're going to completely revamp our marketing strategy as a result of it because what we what this consultant found was that our TV ads per dollar spent are four times as effective as the Sunday newspaper inserts that have been the bulk of our spending on advertising and I said well that's great you know how did they how'd they do it and in the reaction was well we we don't know how they did it is complicated there's just appendix if you want to look at this but look at these great pictures it's all about the great colorful pictures they'd shown with big bars and little bars that convince them that they should they should change the budget now having studied advertising some I was deeply suspicious right because there's almost no question harder than figuring out what they're advertising works or not right it's very hard it's a complicated world it's hard to figure it out so they had no idea how what had happened how they had come to this answer but so I started asking the kinds of simple questions which I think or other kind of right questions to ask so I said to them how do you advertise in a lot of newspapers and they say we advertise in essentially every major newspaper in the country and I said how many weeks of the year do you advertise in the newspaper and they said we advertise every single week of the year in every newspaper in the country okay so got me thinking pretty hard to figure out whether your advertising works or not if you advertise in every newspaper in the country every week of the year what are you going to compare it to how do you know what would have happened is you hadn't done it yeah and I said let me guess I'm guessing you don't advertise every week of the year on TV and as I know our TV ads fluctuate way up and down so let me take another guess I bet you do a lot of advertising right around Thanksgiving and the weeks leading up to Christmas and I said yeah absolutely and I said I think I know how these consultants figured out that your TV ads worked it's because they ran a regression as M as economists do and they found that in the weeks that immediately followed your advertising on TV your sales were much higher than in the weeks where you didn't advertise and they completely in my conjecture missed the point that your advertising on TV because you know christmas is coming and christmas is and your sales are going up at Christmas almost unrelated to your advertising so I said if you give me the data I'd be I'd be happy to look at it I really doubt that you should be completely revamping or your marketing they gave me the data and sure enough with the same kind of regression techniques that economists always used and that these consultants use I could get the return on investment of TV advertising to go from a hundred dollars in revenue for every dollar they spent to negative just by controlling for dummy variables for the weeks of the year that essentially when you did what made most sense you've got a negative value on their advertising and TV it wasn't helping at all might have even been hurting now I went to them and told them this and they weren't pleased they weren't happy about it and they said well how would you so how would you if this isn't right how would you figure it out and I said well the simplest way is just to do an experiment just don't advertise in some newspaper some of the time and you know maybe don't advertise in some markets on TV and advertising others and just see what happened experimentation is incredibly powerful - it's a gold standard of figuring out causality and and they said we no way I mean the sales force will go nuts if we if we pull the inserts from some of the newspapers they said you know one time our summer intern who was in charge of Pittsburgh just forgotten to put the inserts in did like half of the city of Pittsburgh for three months and you cannot imagine the furor that that caused and I said what happened to the sales in Pittsburgh when you forgot to do that and they looked around the room and these were otherwise smart people and said oh my god that's a great idea we never thought they'd look at that okay interesting this is one of the most successful accountant retailers in the world and and and the incredible thing and then they looked at it they did look at them and it turned out they found no impact on their sales in Pittsburgh from from not having it now what I found so interesting about this is that you know this this you know lazy MBA who ended up with could not doing their job and blowing it actually turned out to be much more valuable to this firm than the $500,000 economists who got hired as consultants they could have learned that they did learn a lot more about their business from a mistake then they learned from this this low-quality economic analysis that had been done now what's interesting in the end they still went ahead and revamp the marketing in spite of this and so you can I literally cannot turn on the TV without seeing one of the ads for this company and my my very likely conjecture is that you're going to see if I could tell not time for a good reason I'm not telling you the name is firm but my guess is they're going to miss the profit numbers by roughly the amount of that they're spending that they've upped their their TV budget for this year now I found that the one thing which has been common across all of my experiences with advising businesses is that they have never once taken my advice on anything that I've told them and and I really honestly I think the reason is that I've charged the wrong price right by giving away my services I think they feel not at all obligated to listen to what I say and so they just figure if this guy's giving it away it can't be any good and and I've had no success whatsoever and I've had one but there's one counter example to this of where I've actually helped a business person make a lot of money and I was actually talking to a crowd of investment bankers this is probably now must be six months ago and in the Q&A session they asked someone asked well what are you working on now and so I told about a project I'm working on which is a project with this guy Sudhir Venkatesh who who I did the work on games correcting he eventually got too old to hang out with the crack gangs and got tired of being shot at and he got married and he just died he won't do it so instead he hooked up with a bunch of pimps and prostitutes on the southside of Chicago and convinced them that they that they let us put our trackers out on the street corner so out on the street corner the prostitutes we put people with with clipboards and data sheets and after the prostitute did a trick they'd come back and they'd report everything about that trick to our trackers now it's actually been it's been an interesting it's not even the point this is a complete diversion from the point of my story but anyway so this the project is turned out to be very interesting in a lot of ways one is that um it's I used to think that being a drug dealer was the worst job in America but is it is completely clear to be now that being a Street prostitute is far far far worse just the how bad is but but there's certain things that I think you learn about the inner city that you just can't imagine if you without I mean just through example so one of them is about 7% of all the tricks that the prostitutes do our our freebies to the police to avoid arrest so the police are basically many of them on-duty police officers are demanding sex from the prostitutes and or else they will arrest them another thing it turns out that the local guy who runs a YMCA his budgets pretty tight so he's worked out a deal with the prostitutes where he he lets them come in and have sex in the rooms at the YMCA in return for 20 percent of the of the wages that they're earning from from doing the tricks things like things that you learn out of this study that I think are going to be ultimately I'm very very interesting okay but so I explained a little bit of this work and and so later that night it turned out that one of the investment bankers this was in Chicago had made plans to have a date a date with a $300 an hour call girl in downtown Chicago okay and it just turned out that she happen to be reading freakonomics at the time and that she did her tricks out of her out of her apartment and so we're sitting there on the coffee the book was sitting on the coffee table when this investment-banking shows up for his date with his prostitute and so in order to ingratiate himself with the prostitute he says hey I just saw that guy speak today and he actually he's doing a new study collecting data on prostitution and and so the next day the prostitute writes me and says I have a Palm Pilot loaded with data I wanted you to be interested in knowing anything about my client and so of course I said I was very interested and she said well why don't we meet for brunch okay that was fine but I had to then convince my wife and we have for young kids ages 6 and under and it was going to be on a Saturday and I'm supposed to be home and I had to say well you know I I have them I got to go meet a prostitute downtown we talked about research projects and she went along with it and I wouldn't met this woman this woman was fascinating turns out she had a college degree and she had worked as a computer programmer at a fortune 500 company and was making $80,000 a year and decided that being a prostitute would be a better job so she'd quit a job and became a high-priced call girl set up her own web page and was now making about two hundred fifty thousand dollars a year working about ten hours a week and couldn't have been happier about about the turn that her life had taken and so you know I've been working with all these companies and in one of the big things I've been struggling with the companies is trying to figure out what the right price to to set is okay hi Adi set prices and so I was asking her a lot of the same questions I was asking the CEO is about about setting prices mindful ways to charge in the right price and you know you can imagine I wasn't making much headway and and so you know in order to figure out the right price you need to figure out what the you know what the shape of the demand curve is for the person so so here I am trying to figure it didn't sound right but it's trying to figure out the shape of this prostitute's demand curve and and and finally I hit on the right question to ask and I said to her she had a dedicated line that people called into clients called into when they wanted a date and I said how do you feel when the phone rings on this dedicated line and she said what do you mean I said are you happy and she said well she thought about four I said no I guess I'm like I'm completely indifferent and I said well if you're indifferent you're not charging a high enough price right because of you because you have market power you want to be charging a markup so that if you could get more business at that price it should make you happy so if you're not happy it means you're not charging a high enough price and you can imagine this kind of days look that came over her face when I was explaining about marginal you know markups and marginal cost pricing and stuff and so yeah I didn't see her for a few months and I teach a class at Chicago on the economics of crime and one of the last lectures of the semester I give is I'm economics of prostitution and it hit me that who better to give the lecture on prostitution than a prostitute and so I called her up and she said no I don't want to give you I don't want to give your lecture I've never really done public speaking I'm you know not well educated ah and the thing I know though is that one thing that economists and prostitutes have in common is they will put a price on anything right it's just a matter of getting to the right price and so eventually I convinced her that if she I pay her hourly wage if she would come in and teach my class okay so she agreed she came down turns out she gives a great lecture a fantastic lecture and when I asked my students it turns out that one third of the students thought that um that were there thought that there was the best the single best lecture they had seen in the entire top of the University of Chicago which tells you something about the quality of how we of how we you know what the professor's are doing at the university but along the way we did Q&A okay and in this Q&A someone asked her how much she charges and she says $400 an hour and I get really mad because I talked to her just a month or two earlier and she'd been charging $300 an hour and and when we had bargain over price we had never actually mentioned dollars we just said her hourly wage don't thinking you just cannot trust prostitutes at all because she's like lying to my students about her wage to get an extra hundred dollars out of it it's coming out of my own pocket it's not the kind of thing that you can easily charge through a research budget for hundred dollars to prosecute to teach your lecture and so it sounds like fuming and the next student raises his hand and says well how did you how did you how do you decide what to charge and she turns to me and she gets this huge smile on her face and she says well I was with professor Levitt and and he convinced me my services were far more valuable than the 300 dollars I used to charge and so I raised my price to $400 and it's the best thing that ever happened to me I have put I put five thousand dollars in the bank I wouldn't have otherwise and I just I'm just so grateful for that I that I got got to meet him so let me tell you I'm trying to think what in light of time let me tell you laughs you know I'm the most overexposed to economist in the world so let me tell your story about one of my colleagues who deserves a lot more exposure but but doesn't get it so a lot of Freakonomics is about how how various people fall prey to conventional wisdom and just sense you stop thinking and go along with whatever somebody tells them even though in retrospect it should be obvious that they're doing the wrong thing now the point the story I want to tell next is about how academic economists can fall prey in just the same way to that sort of conventional wisdom thinking okay and and I have also talked very briefly about experiments and how great experiments are and how they're the gold standard of scientific methods and so this story is actually have a somewhat ironic twist because it's it's about economists doing experiments okay an economists don't do very many experiments say in the history of economics it hasn't really been standard for economists to do experiments in the lab and it part of the means is that the kinds of questions economists I want to answer are often not amenable to doing lab experiments so for instance I'm very interested in crime right and one of the big questions I've tried to tackle is do prisons reduce crime so it turns out in everyday data it's not that easy to answer that because when crime gets really bad everybody demands that we lock up more prisoners and build more prisons and so you tend actually to see that prisons in crime often in the data moved together when crimes going up the number of prisoners going up even though we think that more prisoners might have a causal impact of reducing crime so the right way to figure this out right would be an experiment right so if I could take a a dozen cities or dozen states and randomly assign one set of cities and I would force the prison system to let out say 10% of the prisoners in that jurisdiction and I take this other city and I'd force them to lock up 10% of people who wouldn't be locked up otherwise ok these are bad guys but guys you weren't quite bad enough to lock up and I'd come back three or four years later look at crime and I think I'd have a very good idea of the causal impact of locking up those prisoners are recently releasing them on crime now every time I submit this grant to the National Science Foundation they turn it down right I can't get anybody to let me do this and so that's I think part of the reason why economists don't do experiments but what kind of experiments do economists do well it turns out on issues like altruism are our people altruistic you do they have pro-social preferences they care about other people that's the kind of subject you think you could probably study pretty effectively in a lab and so economists have done enormous amounts of research probably I don't know 500 studies might have been done that try to figure out whether people are altruistic okay so economists basically tend to believe that people are not altruistic right there are basic models I built on the idea that people are self-interested I mean even back a lot of Adam Smith sees the roots of economics so that people do the best for themselves and more or less and in most situations that works out for everybody but then these experimental economists came along and they came up with a set of results which repeatedly would flew in the face of this of this this basic view of economists and so so this is simplest version is what's called the dictator game and maybe some of you have been yourself subjects in a dictator game experiment and it's so simple I can explain it in 15 seconds you bring two people usually college students into a lab you go in different doors you'll never see each other it's a one-shot game one of them is a dictator the dictator is given say $10 a roll of quarters and is told this is your money to keep or if you want you can give as much or a little of that to this stranger on the other side of the door and then that's the end of the experiment you go home with your money the stranger goes home with his money or money and that's that's it okay so let's just for fun let's see what kind of research subjects you all are so base with this you're the dictator you've got $10 given you how much do you pass through to that stranger on the other side so who passes all ten if there's always one person in the room who will pass all ten it exactly one person I always say it turns out the lab nobody ever passes all time it's very rare for someone to pass all ten how about five five turns out to be a very common number that something like 15% of the people will be five and and most of the people do one two three four somewhere in that range who gives zero anybody and how many you economists usually it's economists of the ones who give zero and I kind of send everything so I did ask the same question when I was talking to a group from Goldman Sachs and was amazing because not a single hand went up in the room and I thought I guess the Goldman Sachs guys are too good to respond my question until I got to zero and then in unison they all put their hand up it was amazing and and I think that's actually speaks to the point I'm going to make okay so so you come up with three dollars it's roughly the answer you get from the experience that people give away about three dollars at 30% of the money that they're giving us a dictator okay and this has been used as very powerful evidence by economists saying we need to rewrite our models to build in these behavioral biases the idea that people care about others and even got a met Raven a great economist is it got the Clark medal for his work on building fairness into into models of economic behavior so so my colleague John list who Princeton had the good taste to make him an offer last year and fortunately he came to Chicago instead of Princeton I think I think this time Princeton actually paid more than Chicago but we won anyway so there's been some progress made on that front but he was explaining this research to me he's an experimental economist and I said to him that's all great what do you make of this I said when I was living in Boston for a decade I took the subway back and forth to work and to school every day and the strange thing is in those 10 years not one guy ever came up from the subway opened up his wallet said hey I got 10 bucks can I give you three of them right in the lab people are incredibly altruistic but on the subway people didn't seem so altruistic and say what do you make of ad and John listed a smart guy he said well hum he gives that some thought he came back two days later and I said I think I know the answer ok and he went out to do an experiment ok so so first he replicated the result on his subjects that you could get this this 3 $3 of giving and found that and the undergraduates he was looking at you got the same results and then he made one little tiny tweak to this experiment which had done hundreds of times he tweaked it in a way no one had tweaked it before ok and he tweaked it in a way that shouldn't matter at all he instead of making the game you can give away ten dollars or nothing he he made it so you also if you wanted to you could steal a dollar from the guy on the other side of the wall ok now why should this not matter well it shouldn't matter because if you preferred giving three dollars away to a stranger to giving nothing you almost certainly prefer giving three dollars to stealing a dollar from them right so the only person who should be affected are the people who are right at zero the people right a zero are constrained they might very well want to steal that dog ok so then he ran the experiment and something funny happened ok the people who used to give 5 well they're not pretty much disappear and they're giving 2 or 3 the people who were giving a dollar two dollars they now give zero and predictably the people who gave zero they steal the dollars they do follow the economic principle they do steal the dollar from the guy from from the other person ok but it's strange right so the giving has gone from three dollars down to a dollar on average just when there's a little change in the game so then he went a little further and he said well what if we made the game you can give up to all of your ten dollars or you can steal the full ten dollars from the guy on the other side so now it's symmetric so what happened suddenly these incredibly altruistic people who for four decades of economic research have been giving away 30% of their endowments on average are stealing about three dollars from the guys on the other side of the wall they've now become people who are stealing 30% of the endowment and and the most popular number of all it turns out is to steal five dollars okay and so what's going on what's going on is that the people were never giving the money in the first place because it cared about the person on the other side they were giving the money because somebody like me was standing over them with a clipboard watching what they were doing and monitoring their behavior and it and it felt lousy to have someone like me looking at them and say god this guy it's only if over ten bucks this guy won't give a few bucks away to this other student I mean this is it what a horrible person and I think ultimately that's what you discovered what people are really doing is it's not about altruism it's about the fact that people aren't just maximizing their material wealth they're maximizing some kind of your self-image about am i a good person or a bad person and what's ironic about it is that what makes me a good a bad person depends upon what my options are right if I give zero and that's the worst thing I can do then I'm a bad person but if I can steal a dollar and I don't I just give nothing well then I'm not such a bad person after all and that's what I think you see and that's why I think when you do it when you when you do the experiments on economists undergrad economists they tend to be very stingy I think it's not because they're that different from other students I think it's because they know that their professors expect them to give nothing because that's what we teach them in the classes that economists would say that the right answer to give nothing and so they try to please the professor's by giving nothing and I think at goldman sachs what i was seeing was there was tremendous peer pressure right it would be embarrassing of your trader at the end of the day you made five million bucks you said god I feel terrible I took five million bucks from that guy I got to find him and give him back a million dollars because that wasn't really fair like that would be embarrassing and that's why goldman sachs i think a lot of those guys wanted to give away a few bucks but they thought it'd be embarrassing if they didn't but john least had a problem because he had done this experiment with the idea of figuring out why people were giving in the lab but not on the subway but he had he had changed the experiments such that now actually he had created a bunch of thieves in the lab right who were willing to steal the money but i didn't get robbed the entire time I rode the subway in Boston again really replicated the real world and this is where John lists true genius comes through so he does another version of the experiment he takes his students who unwittingly come into play the dictator game and he tells them I actually am going to need you to stuff envelopes for an hour before you play this game it turned out he had another experiment Direct Mail experiment and he was killing two birds with one stone by making these doing stuff his envelope so the students stuffed the envelope for an hour both the dictator and the person on the other side of the wall on the dictator knows that and then he plays the same dictator game from 10 to negative 10 and it turns out that the the last remaining 15 percent of people who in that game had given away some of the money to the strangers disappeared nobody wanted to give the money away when they actually had to stuff the envelopes give the ten dollars instead of getting it as a gift but more interestingly it turned out that almost nobody would take the strangers money when they knew they had stuffed envelopes oh so in the end over 90% of all the people in this last game chose zero as a number that they preferred to give or to take in this game Sir John list in the end had really created a situation in the lab which mimicked very much what happened on the Boston subway people work hard for the money they know other people work hard for the money they more or less leave everybody everybody leaves each other alone so I want to be careful because people some people you know so I've told this story in front of the Teach for America people and and it kind of sickens them when I tell the story because here's Teach for America you're spending two years of your life doing something good for other people and then for me to say that people aren't good so I don't want to I want to make sure my message is clear it's not that I think people are not altruistic people people are we know with plenty of evidence it's a within family families people are altruistic when Hurricane Katrina hit people were altruistic all I'm saying is just 20 years of economic research told us nothing about that right that somehow or another the people doing this research just got confused about what the research meant and it ended up being a complete waste of time I just don't think it informed anything about about altruism but it always kind of leaves people people angry and disappointed a lot of people who unlike economists want to believe that people are kind hearted and so after I did this Teach for America talk a couple days later I got a letter in the mail and it was a very strange letter because it had no return address on it and it was written in pencil the envelope was in pencil in block letters okay and in the bottom corner of the letter it says very important okay so I read the book you know a lot of people don't like me you know there's a whole big groups of society who don't like me at all and who write threatening emails to me whatnot and so of course the first thing that comes into my head is that look at this is anthrax right this thing has just like the feel of an tacs so my cult I call my wife over and I say hey Jeanette could you open this letter for me and and she did she opened the letter and I happened to report there's no traces of anthrax instead what it inside was just a note and it said John list is wrong that's the the full text of the letter and tucked in with that was a $20 bill and what this person was trying to say is that random acts of kindness that can't be traced back in any way shape or form to the donor happen all the time the real world and in here's an example of it so you know I thought that was an interesting approach and I'm an empirical economist I'm driven by data and my view is that you know I encourage all of you in this audience if you think that John list is wrong I would happy to collect more data and to 56:22 Southwood lon Chicago Illinois and please please don't don't forget about the importance of being part of research when it comes to that particular study let me let me take some questions if anybody's got some questions and I don't know if we're going to I'll repeat the question can here there's a tall gentleman here in blue shirt well so so I so it's an interesting point so right the the model in which all people do is maximize their own financial wealth they would take ten the model I think is the right model the world is a model in which financial wealth gets some emphasis and some kind of kind of self-image or where you're more some kind of moral factors also get some weight and and you can predict as an economist you write down a model of what factors influence when people will put a lot of weight on morality and when they won't so I'll give you a good example in front of my kids I act much more moral than I do when I'm say alone in an airport and some for you know faraway City and nobody knows who I am right and so when scrutiny is a very big determinant of how of how moral react here so it's not a coincidence when they pass the plate in church that there's no lid on the top of that thing right because if it turns out empirically that if people other people can see more clearly how much you're putting in you put a lot more money into the plate than you do otherwise and so so in essence I think what you see is that really the model of altruistic or not altruistic is kind of the wrong model of the world because I don't think any of this behavior relates to how we feel about the other person right altruism suggests I actually care about the welfare of the other person my view is that all of this behavior we're in the lab is how I feel about myself and and so that it's really just just not effective at all in in testing that model if you want to test model beltram you got to do something different you got to find a setting in which in which you can kind of random you know figure out whether people it's hard because right the thing that goes with all tourism is if you make a target a target audience like more deserving you're not sure whether that's just playing on the moral qualms of the person or whether they care I mean but I think in general you got to have the belief that people just don't care very much about strangers right so I mean there are you know how do you know that well people give a lot of money when Hurricane Katrina happens and people gave next to nothing the United States when there was a devastating earthquake in Pakistan right so you know just people didn't seem to care very much about the people in Pakistan I think it's partly because we responded to the media and the horrors of Hurricane Katrina it it was not necessarily we weren't reacting because we cared about the people as much as we some how it was how it affected our own our own self something that's a good question thank you other questions people in this crowd and yeah here's one right here yeah so um it's amazing what one kook can do so there's one crazy lady who's on the school board and district 214 in the northern suburbs of Chicago who decided that a whole set of books should be banned okay and it's like a whole you know it's like a our book and you know the a lot of the usual kinds of books that get banned but um but but not mostly not really even that offensive books and so someone say well what you know have you read these books and she readily admitted she had not read a single one of the books on the list and she didn't want to pollute her mind and so what's amazing is that this gets picked up by newspapers all over the place and it never had any chance of passing they hold this meeting and it turned to be very raucous meeting that went till 2:00 in the morning and in the end the school board voted 9 to 1 not to ban any of these books and so it was great for us I mean there's having your book banned as an author it's the best possible thing that can happen to you because then people actually sudden tell me people this is worth reading if somebody wants abandoned this must be worth reading so I think it's a classic case of this is a woman who didn't understand incentives right and so no one was going to be even Guinea of this dune so you're going to read my book anyway I mean they were going to read in the first place but but once they once they once say they decided they want to ban it we convinced the publisher to give away fifty or hundred free copies to to the kids in the school district Greta's great publicity all over the city of Chicago we saw up tons of books it was a it's so one thing economists have learned is that the way to get people to lower consumption is by raising price that banning you know that the trying to do bans it's just usually not a very effective way and this this woman if she were better trained as an economist make sure you've read the book she would have understood that it was completely futile what she was trying to do I still got time for more questions or no okay one more question how about right here it's dealing with the conventional wisdom about real real estate fees yes so the question is have I caught a lot of flack from real estate agents because of what we say so first I mean just for the people who don't know it so what the the one very simple and obvious point we're making the book is that when an expert's incentives are not aligned with their customer the client then they might act in their own self-interest instead of that of the clients and real estate is a good example of that because let's say you're going to sell your house for an extra you had to wait an extra week and you could sell your house for $10,000 more okay almost anyone in this room would say I'll be willing to wait a week to get $10,000 more from a house okay so the real estate agent what do they want to do well so the agent gets 6% of the sale price of the house but they've got to split that between the buyer's agent and the sellers agent and then they got to split that again between the agent and the company that employs them so in the end the agents get about 1.5 percent of the value of the house so on the margin that extra week is worth $150 extra week in the $10,000 is $150 in the pocket of the real estate agent now the real estate agent in the way the contract is structured actually pays all the marketing costs and a lot of the time costs of open houses and showing the house it's not at all clear that a self-interested agent would want to go ahead and keep that that home on the market one more week you can imagine a selfish mill station might just try to convince their client that that's a pretty good offer and they should take the first offer and not hold up for a better one okay it is not just real estate it would be true if the evidence is it we all know mechanic car mechanics are suspect of doing it doctors it turns out what evidence we can probably do it but the bad news for realtors was that um there's no way no doctors don't perform surgery on themselves so it's really hard for me to figure out whether doctors are giving different kinds of treatment to themselves and their clients but real estate agents in Illinois when they sell homes have to list if they have an ownership interest so we can collect a hundred thousand home sales and you know there's a lot of information about the nature of the home even down to the block and then we can see what happens when real estate agents sell their own homes versus when they sell their clients homes and what we saw in the data is that agents get 2 or 3 percent more for their own homes than they do for the client's homes controlling for other factors and and the agents will say well that's just because agents have you better taste and a better choice of colors and stuff like that and so their homes sell better sell it sell it sell for more but the funny thing was that they're the agents left their homes on the market about 10 percent longer than their clients home state on the market and it's really hard to come up a model in which you have such great paint choices that nobody wants to buy your home for an extra 10 percent of the time and so I start some really hard to come up with a model that gives us other than the sort of the agents kind of on the margin pushing their clients except slightly worse offers than they themselves would accept so did we get flack so you can imagine we were not too popular with the National Association of Realtors after this came out in fact they put wrote a letter to us and they put on the front page of their webpage and they said how horrible we were and terrible stuff and not only that it turns out that the the MLS in Northern Illinois which is the data I used they began sending me emails asking me where I got the data and I said well I got the data off your website and they said well we're a member only website you're not allowed to access this data and I said actually I had a member get the data for me and he said what which member did that and I said unless there's some reason why I should tell you I wasn't actually that that member would prefer to remain anonymous and they said that member is it is like he's over months I'm condensing like six months of legal wrangling and in two minutes and so they said okay they say well and they say what form was the data in what form did you get the data and I said tab delimited text file okay I didn't hear from a while after that but I didn't figure that was going to solve my problems and eventually they said again they said who will you that we're going to file lawsuit against you unless you tell us which member gave you the data I said if you will give me up if you show me where in the contract that the member signed they violated the rules I would be happy to you it just goes on and on increasingly threatening letters now the best part of all this and it goes back to conventional wisdom and lawyers is that this was all about this academic paper I'd written and the way you do academic papers you've got this title page it's got the title of your article and the name of the authors and then you have acknowledgments so on the front page of this article we've been raving about for six months and the acknowledgement that says we would like to thank Thomas few mo for providing all the real estate data use in this paper but the lawyers from the for the Evelyn's had never actually bothered to read the paper that they found so offensive and eventually they stopped writing me I think they figured out that I think they finally decided to read the paper and that was and and since then I haven't heard too much the thing that saves me with real estate ins is that almost any agent you talk to will say that is just you know I would never ever do something like that my bond with my client is much stronger but you wouldn't believe the people I deal with on a daily basis I mean I see this behavior all the time and it's funny how every real estate agent sees it all the time but has never done it themselves well I think I've used up my time and it was really really a pleasure having you you
looks interestng
This guy's in the same oversimplifying, exaggerating category as Malcolm Gladwell for me. Thanks for posting this, though.
thanks, fun!
Reading Freaknomics is awesome