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Freakonomics

by Randall Craig on May 30, 2007

Filed in: Blog, Book

Tagged as: ,

I just finished reading another fascinating book: Freakonomics by Steven Levtitt and Stephen Dubner. This pair of authors (one an economics professor while the other an accomplished journalist) have probably done more to explain economics than any of the two-dozen-odd economics textbooks that I have in my library.

Levitt’s area of interest is exploring difficult questions in human behavior by examining data related to incentives. Chapter titles include…

– What do schoolteachers and sumo wrestlers have in common? (It seems that they both have cheated in very specific ways.)
– How is the Ku Klux Klan like a group of Real Estate agents? (How information provides market power.)
– What makes a perfect parent? (What makes a child do better in school, and what doesn’t)
… and several more.

Each of these chapters presents their case through (believe-it-or-not interesting) statistics, and anecdotes. For example, on real estate sales, Freakonomics has looked at the data and noted that real estate agents never take the first offer when they sell their own houses – they hold out for a higher one. Yet, when they sell on behalf of a client, the data indicates that they often will push to accept that first offer. Why? One assumes that the interests of the agent and their customer is aligned – but this actually isn’t so. If a house is receiving an offer of $300,000, then with a 3% commission, the agent will earn $9000. The agent then needs to weigh the possibility of a higher offer coming in later. If an offer were to come in at $310,000, then the extra $10,000 would be worth only $300 to the agent – but $9700 to the customer. Yet the delay in selling may cost the agent well over $300 in extra advertising, time spent running open houses, etc. So according to the data, they will (almost) always push to accept the early offer – even if they know the house will sell for more later. (And again, the only exception to this rule is when they sell their own houses.) Fascinating!

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Randall Craig

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About 

Randall has been advising on Web and Social Strategy since 1994 when he put the Toronto Star online, the Globe and Mail's GlobeInvestor/Globefund, several financial institutions, and about 100+ other major organizations. He is the author of seven books, including the recently released "Everything Guide to Starting an Online Business", and speaks across North America on Social Media and Web Strategy. More at randallcraig.com and 108ideaspace.com.

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