Keynote address by doctor Steven Levitt

thank you very much Robert that was a wonderful loving kind introduction hi gratulations to all the students here so I'm gonna start by telling you a story that you probably already know about about King Solomon from the Old Testament so he lived about a thousand years before Jesus Christ and he was king of Israel he's had many accomplishments she had five hundred wives I think if I remember the story exactly right and and he's known today primarily for his wisdom and kindness is a ruler and the story of most of us know relates to a dilemma he found himself in when he was approached by two women it turns out that these two women at each had babies around the same time and one of the babies had died and there was a conflict where both women were claiming that the remaining baby that was alive was their own baby and so I'm sure many of you know the story King Solomon showed showed himself to be an honorary Economist when he thought about how to solve this problem because in a typically economic fashion he he did he didn't worry about necessarily what seemed to be right or wrong he simply said the efficient thing to do would be to cut the baby in half and give each of the mothers half of the baby and and the one woman who seemed quite satisfied by the solution half a baby seemed better than no baby at all and the other one cried out and said no no let the other woman have the baby at which point King Solomon revealed himself to be perhaps not just a regular economist any old economist might have cut the baby in half but a really good economist because at that point he he gave the baby to to the woman who said you know don't cut the baby in half thinking that the only kind of person who could possibly want to cut the baby in half would be the same kind of person who would steal a baby from from another mother and I believe he had the other I think he had the one mother executed as a result of determining from this evidence that you to cut the baby in half that she was indeed baby thief so again he he exhibited the hallmarks of a of an honorary economist in thinking about the right solution to the problem now I don't know you're probably talking to exactly the wrong age ranges when I talk about David Lee Roth now the students are too young to know who David Lee Roth is to see was the lead singer of a band called van Halen and probably the parents are too old to know who David Lee Roth this but bite of in spite of the name of the band van Halen it was not a Dutch band it was an American band and and David Lee Roth was the lead singer and it turns out David Lee Roth is also an honorary economist now it wouldn't seem that he would have much in common with King Solomon the wise king of Israel but it turns out that they had a number of things in common David Levi so so Van Halen and I should tell you if you don't know was a was one of the first big popular heavy metal bands so they had long hair and they sang loud music and they played these big concerts and so it turns out that what did they have become it turns out David Lee Roth was also Jewish just like King Solomon his dad had been an ophthalmologist and he had learned how to sing it turns out practicing for his Bar Mitzvah it's where he first learned that he had a good voice and he also was quite prolific with women it turns out he had a reputation for sleeping with a different moment at every single concert that he did and they did it very long concert tour so he didn't quite match King Solomon on that on that on that measure but he did pretty well but it also turns out that deep down David Lee Roth was a really excellent economist as well when Van Halen toured they had a 63 page contract that they sent around to every concert venue that detailed exactly how they wanted the stage set up and in addition that all the special things that the band needed done for them so on page 40 of this rider it described what they called munchies okay the various things he needed to eat and if the concert was on an even day I think it was fried chicken broccoli Brussels sprouts and they went on and on they named exactly the foods that they wanted okay and there was a you could have popcorn and this and that and never paper plates or plastic forks always had to be real China for them okay and the kicker was and this is what David Lee Roth got a lot of and the band got a lot of criticism for is that they always had to have Eminem's the candy but there absolutely could not be any brown M&Ms amongst the M&Ms that were in the candy jar okay and it turned out if they were ever caught to the concert venue and there were brown M&Ms it was guaranteed that they would destroy the entire room they would rip to shreds the entire room okay now people said what a prima donna what a horrible person when it was banned is is so full of entitlement it turns out though that something deeper was going on that that this concert that that van Halen put on was one of the first really big stage production said incredibly heavy equipment and and many of the stages were not well built at that time and so they needed to be reinforced in various ways until of the 63 pages of this contract about 30 were about the physical specifications of what was needed to make the to make the concert safe okay so that the stage wouldn't collapse the things wouldn't fall down and the reason that David Lee Roth said there could be no Brown Eminem's is that if he walked into the green room before the concert and he saw that there were no brown and M&Ms he knew that somebody had read line by line every line of the contract up and paid until page 40 okay and he knew that probably it was safe that they had looked at what had happened hey if he saw a brown mm in that bowl it was just a very quick way to understand that probably nobody had paid attention and they had to look at every single detail of the stage to make sure that it wouldn't be a collapse so really David Lee Roth and King Solomon both do exactly what it means to me to think like an economist to me as Robert said and one part of become economics is macroeconomics which is all about inflation and interest rates and innovation but the the really the heart to me the heart and soul of economics is about incentives it's about human behavior and how to influence human behavior and and indeed what King Solomon and what David Lee Roth Lee was even one step beyond that it's how to actually yeah do what we would call mechanism design how to create incentives so that people reveal themselves either as a true type or or a fake type and that in the essence is a lot of what of the cleverness and the excitement of economics is designed to do I've managed to make a little bit of a career in economics despite having any talent and the only possible talent that I have is that I keep my eyes open and I look at the world around me and and I try to have ideas I mean one of the luxuries I mean the academic system is so crazy especially in the u.s. so my entire obligation to teach in a year I'm in front of a classroom about 50 hours a year okay and and I have the rest of the time to do whatever I want to do okay and sometimes like doing things like come and speak to nice people like you here today but a lot of times I sit around and I try to have ideas I've probably probably spent at least 10 hours a week for the last 20 years trying to have ideas so when a given a giving you I spend about 500 hours a year thinking which purely thinking only trying to think of ideas think of what's interesting what I could study not actually doing things trying to think about this and what's sad is I'm not very good at it because I consider it an excellent year if I have one or two good ideas I think I've done well okay and out of 500 hours it doesn't seem like a very good investment 500 hours to get one or two good ideas I store most of what I do is so trivial that it's just embarrassing to even talk about it but but but on occasion I've done things that actually maybe have mattered just a tiny tiny bit I'll tell you a story about one of those things so I talked about how I how I caught the sumo wrestlers cheating and I also caught a bunch of teachers in Chicago it turns out the teachers in Chicago were erasing the answers that their students were putting on the standardized tests and then filling in the answer so so I caught a bunch of elementary school teachers eating and and rightfully I was criticized criticized by um by all sorts of people saying is so trivial you know why can't you do something more important and and I figured out that a great answer to that to that sort of criticism was to say that I was working on the simple problem so I could develop tools and methods that would allow me when I had the opportunity to answer the really big important problems and I didn't really mean that I just learned that that was a good answer I could give people but sometimes you actually stumble you make mistakes in your force to uh to make good on your words and I did that when when Stephen Dubner I eventually wrote for economics with he came out to interview me for the New York Times and he ended up it was crazy but he ended up interviewing for 36 hours over three days there's one of the most exhausting three days of my life and and by the end of it I was a bit delirious and I and I lost my sense of good taste or measure I mean usually when you talk to reporting every single word that comes out of your mouth you think what will it sound like if that appears in the New York Times okay but after 36 hours you just kind of you lose your inhibitions and we were having a few drinks and he said well what about what about terrorism he said to me and I blurted out without thinking if I just had the right data I would be so much better than the CIA at catching terrace okay so CIA are the people in the u.s. in charge of catching terror as soon as I said it I said oh my god what a stupid thing to say and I said thanks thank God it's the last hour of 36 and he's got 36 hours of transcripts and what's the likelihood that that one incredibly dumb sentence will come out in in the PC right time so he writes a profile and there's a really nice profile and greatly enjoying it and until I get to the last line of the last paragraph where I throw down the gauntlet to the CIA and the whole piece ends with me saying that if I had the right data I would be so much better than the CIA I catching tears so two days later my phone rings and it's the CIA okay but they were nice about it and they invited me and so I'm going to tell you some stories about the CIA none of which are classified or anything and they invited me to come down to the CIA to visit their headquarters because they had a new project which at that time was a top-secret project and they wanted me to give them feedback and they said we're gonna have seven financial traders come down because this new is nothing secret about this at all they had a program that was supposed to try to use financial markets trading and financial markets as an early warning sign for terrorist activities so for instance when when the 9/11 bombing happened in the u.s. at terrace jeff in the US there was some speculation that the terrorists had sold short on the airline stocks that they had traded against the airline stocks in order to profit from the attack now it turns out there's no support for that whatsoever in the data okay but that was the story that was told and that was the prompt for the CIA to build this system so you know if a terrorist decided they were going to blow up a bunch of McDonald's restaurants then they would they then one of the clues might be if there was unusual trading activity where somebody seem to be very pessimistic about McDonald's stock okay so what they did was say we're gonna have a bunch of traders come down and they said we're going to give you three different scenarios and we want you to take if you were a terrorist financier how would you trade the profit from these different scenarios and so they said we want you to work independently and we want you to come up with your answers before you come to the CIA and then we're going to talk about them when you're there I said sure so the seven trader showed up and I told and they gave to no one was about a nuclear power plant one was about McDonald's I forget what the third one was okay and we showed up and and we went around the room and every one of the traders basically said the exact same thing that I had thought is if I'm about to go up and blow up a bunch of McDonald's how dumb would I have to be to sell short the stock the week before I do it here's what's the first thing the authorities are gonna do after all the McDonald's be blown up is they're gonna go look and and figure out who's been trying to profit from it it would be crazy it would be the most detectable thing in the world okay now on the other hand what could you do you could you could trade something you know you could trade something like what we call the S&P 500 right or the would see 100 something this is stock markets gonna go down if there's a big terrorist attack it's highly leverageable it's very liquid so you could basically we've figured out another's agreed you could make maybe ten million dollars fifteen million dollars by by loading up on these securities before they attack and then cashing their what afterwards and be very hard for authorities to track you because a lot of different reasons you might be pessimistic about the u.s. stock markets so we went around the room and every single one of us said the same thing okay and it was terrible for the CIA because if this was really the way that the terrorists financed here's were trade it would never be detected by any of the things that they had built okay so all of us as we spoke felt so smug because look this how could the CIA be so dumb it was just like I said like what a terrible idea they'd have something like a team of 20 working on this for six months and it made no sense whatsoever and I remember feeling so proud of myself at that time but there was one last trader who spoke and after us and he told an incredibly chilling story he said all of you are stupid and I thought well we're not we're not to do with the CIA stupid but we're not stupid he said you're all stupid said I'm gonna tell you a story he said I was sitting in my office one day just looking out the window and and ice washed a plane smash into the World Trade Center and I leaped out of my chair and I ran to the phone I picked it up and I called my trading desk and I said sell every single thing we own sell it as fast as you can don't ask questions I'll explain later okay and I went back and I set my chair and then seven minutes later I couldn't believe it but another plane smashed into the other Tower of the World Trade Center and I leapt out of my chair again and I ran to the phone and I said I don't care what price you get sell everything we own sell short whatever you can any market I don't care what it is yeah I wouldn't that back down to my seat and then they closed the markets about seven minutes later and when I tallied up the profits we made over twenty five million dollars in that you know 20 minute period when we were trading when I had seen that they know and I believed every single word the guy said the entire day except for the next sentence where he said and I gave all that money to charity they say I could do an algorithm where I could run someone's banking data through my algorithm and 99% accuracy I mean how tremendous would it be to be 99% accurate so that when you showed me a terrorist banking data I could tell you yes with 99% certainty that guy's a terrorist okay and if you showed me a non terrorist banking data with 99% actors I say that is not a terrorist I mean that would be an incredible success for an economic model I think everyone would agree to that okay so in the u.s. they're about three hundred million people and let's just say there are a hundred terrorists in the u.s. so if I had this amazingly great algorithm and I ran every American through it then I would go to the CIA and I'd say gentlemen ladies I have a list of suspected terrorists okay and that list would have three million and 99 names on it okay the 99 would be the 99 out of the hundred terrorists that I'd correctly identified and the three million would be the false positives of the three hundred million innocent people one percent of them who I incorrectly thought was a terrorist they would last me out of the room right with thrilled what a list with three million in 99 people so really what you needed for this to be useful was you needed an algorithm which was like 99.99999% accurate okay and we're in the world how in the world what we're gonna do that okay and it didn't occur to me how hard a problem it was until we started in a year into it we had made almost no headway so we were maybe we had we were maybe you know using everything we had we we were lucky if we were 99% accurate it was totally hopeless we're just about to quit and then I stumbled on to an idea and it turns out in retrospect it is so completely obvious okay but it's hard to see so we wrote about it we didn't and so in our book super freak knives he wrote about this but we actually didn't give away the secret okay because we thought it was so powerful and so that it actually had some value and so we just called it variable C and we invited people to guess and I've had probably 500 people write me with guesses about what this variable is so what it was that turned out there didn't be one variable that was a thousand times better than all the other variables combined after you know who the carrots were okay and no one has guessed it what's interesting because it seems now to me so completely obvious and I kicked myself for not having come up with the idea in a year okay but the idea is unbelievably simple what we can observe is we have automatic ATMs you know cash machines and we can tell whenever someone goes to the cash machine okay and we see which cash scene they went to and the timestamp on the time they went and it turns out that if you if you show up at an ATM within five minutes of a known terrorist it increases your likelihood of being a known terrorist by maybe fifty times okay but generally what we're saying is terrorists tend to hang out with other terrorists okay and they tend to go to the bank to try to get money and what terrorists are very careful about what they do with their cell phones okay and what can we do with emails because they know people are looking at it I think they never suspected that ATM machines would be a way to link them together so they weren't very careful about that behavior okay now that's a good start but what really is telling if you show up at an ATM machine within a few minutes of a known terrorist in London and then maybe three months later you show up in Birmingham within three or four minutes of another different known terrorist okay then basically you're a terrorist by chance there's very little chance that an innocent person one of yourselves well just happen to stumble into an ATM machine when it in a terrorist happens to be there and then just happens to be across the country with another terrorist a few minutes later I mean the odds against that are vanishingly small so it turns out that once you when you start showing up over and over with known terrorists taking money out of the bank it incredibly increases your likely so out of our seventeen million customers that we were looking at there were about thirty who from various a combination of the other variables but almost all this variables he just looked unbelievably suspicious to us okay so we're academics so we do everything slowly and so we we got these insights and we just kinda you know I got distracted with other things and and we decided that we should wait six months and just see whether indeed the algorithm had any predictive value okay because it was a little bit is it was hard for the bank it's not really standard practice for the bank to like go to the British government and say we've poured over our so our clients and we want to hand over a bunch of them to you as terrorists okay because if you're wrong it's very costly to the bank of this becomes probably but what we did we waited six months and it turned out over that time there were seven of their customers out of seventeen million who were who were arrested by the British government on charges of terrorism and it turned out that three of those seven were on our list of sixty okay so to understand how incredibly good that list turned out to be you have to know statistics and it turns out that it's just undid depicts sixty out of seventeen million then have three of those three of those sixty show up out of the seven who were arrested is absolutely an amazing accomplishment okay at that point we got the permission of the of the CEO of the bank to take the remaining 57 on the list and it was actually one of the most interesting experience that's ever had as an academic that I went they gave me a novel I had never seen any identities of anyone because everything was always kept for me for presidents and they literally handed in the greatest British tradition an envelope with some kind of ancient royal wax seal on it so I couldn't fit names and I literally walked over to mi5 headquarters and I he ended this envelope to the head of mi5 and he said thank you and then I walked out of the building it was an amazing experience for an academic to do so let me end with something very very different just to prove to you that I believe economics is alive and well in all parts of life so when I wrote freakonomics it it gave me so many opportunities were actually people started coming to me with ideas and insights and I was actually speaking to a crowd in Chicago as a rah it's a roundabout way to get in the survive speaking to a crowd in Chicago of private equity people and we had a Q&A session at the end and one of the guys in the audience he was from out of town he raised his hand and he said well what are you working on now and it turns out at the time I was working on a project on on street prostitutes okay and and so I explained that in weed Chicago we had our trackers out and and it's one the most interesting projects that I that I ever did we would send people out to the street corners and into the brothels and we would record all the transactions that were done between the prostitutes and their clients and it turned out to be incredibly informative study for me because I learned more about how the economy really worked okay and it had and it really it changed my way of thinking all right so back to my story Here I am I've spoken to these private equity guys and it turns out that the guy who asked me this question about what I was working on well he was from out of town and he was a bit lonely and so he had arranged to have what I might call a date with an escort a prostitute in the city of Chicago and she was a high-priced prostitute so she did her tricks out of her apartment and he showed up and knocked on her door and he walked in and much to his surprise sitting on the coffee table was a copy of freakanomics she was reading my book Freakonomics so he said to it while did you know that Steve Levitt is collecting data on prostitutes in the city of Chicago and she was kind enough this prostitute to write me an email and she wrote me an email that said hi I'm a hope for a high-priced call girl in the city of Chicago and through a mutual acquaintance of ours I've learned that you're collecting data on prostitutes she said I have a Palm Pilot with all the data on all the clients I've ever served is that the kind of information you're hoping to gather and I wrote her back immediately I said absolutely that's the kind of data I'm trying to gather how can I get my hands on it and she said well why don't we meet for brunch and and I'll give you the data and and I said great okay so I showed up we have brunch and and we we talked for maybe five or ten minutes about the data and the handover the data we figure out how she can give me the data and there we are at brunch and I'm a pretty socially awkward to begin with and Here I am having having brunch with a prostitute probably another 30 minutes wondering what are we going to talk about so uh it turns out cuz of Freakonomics I've talked a lot with CEOs and I've had the opportunity so I just decided I would ask her every question I could think of about her industry and hoping I would learn something and she turned out to be an incredibly interesting woman she had a college degree she had been a computer programmer she had worked for one of the biggest companies in America making $80,000 a year and about three years earlier she decided being a prostitute would be a better career path so he said she took Mike's not my advice but she took her own device about quitting could not have been happier about the change in her life so she had used to computer programming skills to build a webpage and she was now working about 10 or 15 hours a week making between two and three hundred thousand dollars a year and she could not have been happier about what had happened and so we talked about her industry she really knew a lot she was a pretty good intuitive economist I would say but I finally tripped her up on the topic that trips up almost every business which is I'm setting prices I said how'd you how did you decide what price to charge okay and she kind of looked into space and she said well you know I didn't really have any idea what price to charge so I just went on the Internet and I looked at what some of the other women were charging and there was a big range of prices but it was kind of centered around three hundred dollars an hour so I decided to charge $300 an hour myself okay now if you're an economist you know that's not how you set prices right we have rule with the inverse elasticity rule right if you know you you need to know the elasticity of demand and your marginal cost you know exactly what prices are you don't look on the internet to see what your customer year-year competitive charging so I tried to think is there any way that I could ask for a question that would help me to understand whether she was charging the right price and I remembered that earlier in the conversation she had told me she had a dedicated phone line that only her clients called her so after how do you feel when when the phone rings and she thought about it and she said you know I don't even really care whether the phone rings or not and I'm kind of indifferent I mean a lot sometimes if I'm not in the mood I don't even pick up the phone at all one when my clients call me I said my god you're a local monopolist you have a downward sloping demand curve if you could sell one more unit of your good at the same price as your last unit and you're optimizing of course you'd want to pick up the phone you'd love it when the phone rang I mean you can't possibly be charging a high enough price she looked at me totally befuddled but look I mean I wasn't there to maximize her profits I was just trying to get access to a Palm Pilot so it didn't I didn't go in any detail or explain any more we parted ways I never thought I'd see her again but I teach at the University of Chicago I teach a course to undergrad on economics of crime and because I was doing this new research on prostitution I decided to add a lecture on prostitution I sat down to write that lecture well it's hard to write a good lecture I didn't have very much good material and it was frustrating and then I had a great idea one of my few good ideas that year and that was why don't I call my prostitute friend and have her guest lecture for me that I won't have to write the lecture and and the students will probably like it so I called her on the phone and I said hi how would you feel about coming down and lecturing at the UFC and said oh no you know I'm a very private person I'm a terrible public speaker there's and there's no way I could ever do that no I know a lot about economists and enough about prostitutes to know that we have one very important thing in common okay and the word Kant doesn't really enter our vocabulary it's not about a do this or can't do that's these what's the right price right what price will it take me to get me to do it so I said well what if I paid you your hourly wage to teach my class Oh oh I misunderstood for my hourly wage I'd be delighted to come teach your class you just tell me what day you need me to come down anyway she'd come to town she teaches my class it's an unbelievably great lecture a third of my students when I asked them the next class said it was a single best lecture they had had in their four years at the University of Chicago which is an incredibly sad statement about what me and my colleagues are doing in the classroom but in the Q&A session that followed her lecture one of the students raised his hand and he said how much do you charge okay and and the prostitute says I charge $400 an hour okay and I become absolutely outraged okay because in our bargaining I was trying to be like polite intelligent I told her I'd pay her hourly wage okay and she's there for two hours so I'm thinking I got a payor already out of my pocket six hundred bucks and then she lies to the students okay and says she charges $400 an hour and rips me off and then the next student raises her hand and says well how did you decide how much to charge and and the prostitute turns to me I'm over there and she's got this big beaming smile on her face and she says well you know the very first time that I was with professor Leavitt so thank you very much congratulations

Channel: Erasmus School of Economics

Views: 12,955

Rating: 4.9327731 out of 5

Keywords: Steven D. Levitt (Academic), Keynote (Type Of Public Presentation), Meeting, Erasmus University (College/University), Rotterdam (City/Town/Village), University (Building Function)

Id: YnUdXHBDe9M

Length: 30min 22sec (1822 seconds)

Published: Tue Jun 16 2015