#5 - Freakonomics by Stephen D. Levitt & Stephen J Dubner

Freakonomics is the wonderful collaboration of a brilliant, quirky economist, Stephen D. Levitt, and the concise, eloquent author Stephen J Dubner, that explores the hidden side of everything. 

If drug dealers are so rich, why do they still live with their moms? 

What is more dangerous, a gun or a swimming pool? 

How did the legalization of abortion affect the rate of violent crime? 

Freakonomics is the remedy for a curious mind, exploring conventional knowledge to understand what’s really at play. This is another book in this series that was clearly not written to be of practical application in a business setting, however, there is a poignant lesson that will adjust the way in which you approach day-to-day challenges. 

I read Freakonomics in February 2020 as MultiplyMii began onboarding its first batch of team-members beyond the founding members. Personally, I find this book particularly helpful for understanding human behavior, so it was perfectly timed to teach me an important lesson before we started working with our clients and employees. 

My Most Important Lesson from this Book?

The Power of Incentives - Freakonomics contends that human beings are driven by their desire to get what they want, and they will always look for ways to achieve their ends on the path of least resistance. Simply put, people will do what they are incentivized to do. Therefore, proper incentive design is key to motivating the people around you to do what you want them to do. 

There are three basic flavors of incentive: economic, social, and moral. 

For example, take an anti-smoking campaign: 

Economic Incentive - governments have added a $3-per-pack ‘sin tax’

Social Incentive - banning of cigarettes in restaurants and bars

Moral Incentive - guild-inducing commercials on the effects of second-hand smoking for children 

Throughout the book, Levitt and Dubner explore the influence of intelligently designed incentives, as well as misguided incentives that have led to an undesirable outcome. 

For example, a preschool in Haifa wanted to prevent parents from picking their children up late, as their teachers were forced to stay late after hours. The preschool implemented a $3 fine for any parent who was more than 10 minutes late on any given day. What happened? The number of late parents increased, as while an economic incentive had been introduced, the social and moral incentive had been diminished, and parents associated being late with a $3 fine, instead of with feelings of shame (social) and guilt (moral). 

How we’ve used this lesson in our company? 

This is a lesson that we’re still in the process of learning, implementing, and evaluating. Levitt, an authentic economist, warns on trusting intuition for any type of incentive, for often it misleads us to believe something that will eventually backfire. As such, any type of formal incentive program in MultiplyMii is by definition temporary and subject to change month-on-month. 

What I’ve really gained from Freakonomics, however, is that a financial incentive program is only a third of the way to building a true stimulus to improve performance. There need to be social and moral incentives to motivate people as well. For example: 

Social Incentive: Excellent performance is recognized in a public forum on a regular basis

Moral Incentive: We frequently discuss our mission to create as many gainful employment opportunities in the Philippines as possible 

Additional Nuggets of Gold

• Information Asymmetry - Situations in which information is unequally distributed between parties, and the ‘expert’ is at a considerable advantage. Freakonomics reminds the reader that these experts are motivated by incentives as much as anyone. 

For example, a real estate agent may not necessarily be looking for the best deal for you, rather the best deal for themselves, and you would be none the wiser. Similarly, doctors may recommend expensive treatments and politicians may push policies at the expense of general society. 

• Beware Conventional Wisdom - Conventional wisdom is designed to help us make sense of the world, and confirm our preconceived notions - however, it’s not necessarily correct. Freakonomics explores countless examples in which conventional wisdom is flawed, such as the causation of a reduced crime rate in the 1990’s.

Who Should Read this Book?

This book is essential for entrepreneurs who are beginning to manage people for the first time. Very often, founders are not naturally strong at management - they’re typically highly conscientious, creative, charismatic individuals, and approach management quite unintentionally.

Note - this isn’t a book about management; it’s a book about understanding the natural tendencies of humans.

When you’re a small business, ensuring that your employees are stimulated and maximizing their output is paramount. Generally, you won’t have the resources to compete with corporations on their compensation and benefits package, so you need to be creative in how you motivate employees to share your commitment to the business. 

Freakonomics will help you think differently about problems in your business, from your pricing model to your company culture. Everything boils down to incentives, and your role as a founder is to establish the correct carrots and sticks, both overtly and covertly, to drive your business forward.  

Favorite Quotes

“Morality, it could be argued, represents the way that people would like the world to work, whereas economics represents how it actually does work.”

“If you both own a gun and a swimming pool in your backyard, the swimming pool is about 100 times more likely to kill a child than the gun is.”

“A rogue economist explores the hidden side of everything.”

“For emotion is the enemy of rational argument.”

Series Introduction - How Books Replaced a College Degree

#10 - The Hard Thing About Hard Things - Ben Horowitz

#9 - The Lean Startup - Eric Ries

#8 - Outliers - Malcolm Gladwell

#7 - Zero to One - Peter Theil

#6 - The Undoing Project - Michael Lewis

#5 - Freakonomics - Stephen D Levitt & Stephen J Dubner

#4 - Steve Jobs - Walter Isaacson

#3 - The Sales Acceleration Formula - Mark Roberge

#2 - Multipliers - Liz Wiseman

#1 - Traction - Gino Wickman