Key Messages
Understanding The Role Of Incentives In Encouraging Good Behavior
Incentives have been used for centuries to influence people’s behavior, whether it’s to do more of a good thing or less of a bad one.
The most effective incentives are those that encompass all three types: economic, social and moral.
It’s this combination that encourages people not to commit crimes by providing them with incentives in the form of economic sanctions, such as loss of employment or freedom; a moral incentive, as doing illegal activities is seen as wrong; and social sanctions, such as public shame or loss of reputation.
Incentives can target a person’s wallet, pride or conscience, giving them an incentive to abide by the law.
Be Careful When Introducing Incentives As They Can Have Unintended Consequences On Behavior
In Freakonomics, the example of daycare centers in Haifa, Israel is discussed to demonstrate how incentives can often produce unexpected reactions.
Initially, a penalty of three dollars was introduced if parents picked up their children late.
Surprisingly, this act had the opposite effect intended – the number of late pick ups significantly increased.
This indicates that simply offering incentives can have unintentional outcomes when impacting behavior amongst people.
It is important to take into account existing motivators and existing dissuaders when introducing new incentives as they may become overshadowed or may pressure people more into undesirable behaviors.
For instance, in the case mentioned above, adding a financial disincentive for being late replaced an already established moral one: the feeling of guilt for arriving late.
This then allowed parents to “buy off” their sense of guilt for just a few dollars instead of experiencing it each time they were running behind schedule, which led to an increase in late pick ups.
The conclusion is clear – while introducing incentives may appear to be a straightforward path towards influencing behavior, it has to be approached thoughtfully and carefully since there can be unanticipated outcomes.
The Incentives That Work For Some May Not Work For Others: Context Matters In Influencing Human Behavior
The lessons to be learned from Freakonomics is that incentives depend on the context.
What may work at one point in time could be completely ineffective at another moment.
For example, Paul Feldman’s study found that customers in his bagel snack service were more likely to pay when the weather was unseasonably warm and less likely to pay when it was cold.
He also noticed that on stressful holidays like Christmas or Thanksgiving, payment rates went down while on relaxing holidays payments increased.
Even office morale affected customer payments — offices with happier staff were more likely to pay up.
These observations demonstrate how different factors can affect a person’s reaction even when they face similar incentives.
Something as grandiose as 9/11 also had an effect on payment rates, inspiring universal compassion among customers at Paul Feldman’s business and leading them to pay more readily for their snacks.
Ultimately, these examples show that the same incentive might work differently depending on external factors such as weather, holidays or global events; or internal factors such as an individual’s moods and emotions.
It is thus important to take these circumstances into account before deciding what incentive will motivate your target audience best.
Beware: Experts Can Use Their Information Advantage To Exploit Laypeople For Profit
When an expert has access to information that the layperson does not, an information asymmetry exists – one that can be taken advantage of.
This is particularly true in matters involving real estate, where most people need to hire a specialist for guidance due to the complexity of the transactions.
The advice given by the real estate agent may be meant to support their client’s goal, but it’s not always in your best interest.
Since commissions are linked to the final sale price, agents often have incentives to profit more by closing a deal quickly and at a lower price than what would maximize their client’s return.
Comparison studies have proven this theory – when estate agents sell their own houses they leave them on the market longer and get a higher pricethan they do when working on behalf of clients.
Therefore you should remain alert and aware of situations where experts could potentially use their informational advantage over you for economic benefit.
Be Wary Of Experts Who Exploit Your Fear To Cheat You
When facing and dealing with an expert in any transaction, you may find yourself easily intimidated by their vast knowledge on the topic.
Experts can take advantage of this feeling of helplessness and uncertainty to manipulate you and get more out of a transaction than what is fair or reasonable.
These tactics are typically done by scaring or worrying the customer into buying something that they otherwise would not have chosen- such as convincing someone that a pricier car is safer than one at a lower cost.
They may also try to make you feel bad for not taking their advice or services, like guilting someone around the funeral service process.
The truth is, experts frequently use fear and anxiety to exploit laypeople for financial gain.
To counteract this exploitation, it’s best to have strategies in place that allow you to take some time away from the situation to consider your choices properly- research a transaction before getting fully immersed in it, or saying that you need a second opinion before making a decision, for instance.
By doing these steps ahead of time, you can better protect yourself against expert manipulation.
The Internet’S Impact On Reducing Information Asymmetry And Expertise Advantage
The Internet has been revolutionary in reducing the information asymmetries which historically enabled experts to take advantage of consumers.
Thanks to the development of price comparison websites, customers have easy access to information about products and prices that would otherwise have been difficult and time-consuming to obtain.
This makes it much easier for customers to know what a competitive offer should be when dealing with an expert – they no longer need to rely solely on the word of the expert as they can independently ascertain what is fair.
A great example of this phenomenon is seen in life insurance markets, where easily accessible info regarding prices caused other higher-priced companies to lower their prices or risk losing out on customers who had better options elsewhere.
In the case of estate agents when buying a house, customers now can determine what an appropriate offer is before finalizing a purchase.
The reach and convenience of internet connectivityhas helped eliminate much of the informational advantage that experts used to enjoy.
Consumers are now more armed than ever before with facts so that they can make informed decisions – making markets more efficient and driving down costs for all parties involved.
The Power Of Information Asymmetry: How Even A Lack Of Information Can Have A Devastating Impact
Uncertainty caused by information asymmetry has a huge impact on decisions people make.
An oft-cited example is the value of a car – as soon as it leaves the lot, its price drops drastically, despite being brand new.
This is because customers struggle to figure out why the seller is parting with the vehicle and not knowing the real (or perceived) reason leads them to assume that there must be something wrong with it.
The same phenomenon occurs in other settings too, like online dating sites.
Research shows that omitting one’s photo is the single worst thing a user can do if they want to garner interest – without seeing what someone looks like, others will fill in this gap of information and make assumptions about them.
This highlights an important lesson: no matter what sort of transaction you’re engaging in, always consider the information the other side expects to receive from you and be aware of what conclusions they may jump to if you leave out something important.
When sellers fail to provide full details, their customers often end up penalizing them by making negative assumptions.
We Fear Risks Disproportionately Based On Our Imagination And Perception Of Control
According to Freakonomics, the way we evaluate risks is often swayed by two factors: how easily we can imagine them and how much control we feel over them.
For example, it’s easy to imagine plane crashes, gun crime or terrorist attacks occurring due to their excessive coverage in the media.
As a result, people are more likely to overestimate these risks despite their actual rarity.
This is also true of swimming pools versus firearms: although swimming pools pose a greater risk of tragedy, people often feel more comfortable with swimming because it doesn’t evoke fear or horror the same way guns do.
Furthermore, when it comes to travelling, people worry disproportionately about flying versus driving even though both forms of transport carry roughly the same level of risk.
This is because we are unable to control what happens on an airplane as opposed to a car where we’re firmly in charge behind the wheel.
The only way to resist our biases when evaluating risks is by seeking out solid facts so that our gut reactions don’t cloud our judgment.
It’s important for us all to be aware of our own susceptibility when it comes to assessing threats so that we can make better and more informed decisions about them.
It Is Easy To Fall Prey To False Causality When Making Assumptions
Freakonomics teaches us that it’s dangerous to assume anything in this world.
We can look at the example of the city of Washington DC and Denver: they have similar populations, but Washington DC has three times as many police officers, and eight times as many homicides.
It might be easy to assume that more officers equal more crime, but there could actually be a range of underlying causes responsible for this difference.
The same goes for elections- When seeing money contributes to political campaigns, we tend to assume causality; that money was responsible for the election win.
However, looking into successful candidates who had influential campaigns revealed something else: they simply attracted more money because they were either seen as a clear favorite or represented a close race where individual contributors could make a difference.
It’s likely that their success led to their campaign receiving funds – not vice versa.
At the end of the day, we should be careful when trying to find correlations between variables – just because two things happen simultaneously doesn’t mean one event caused another.
We Need To Look Beyond Obvious And Immediate Causes When Investigating Causality
As Freakonomics reveals, when trying to find the cause behind a certain event, our minds often jump to the most obvious and immediate conclusions.
We focus on what is closest at hand, rather than looking for more distant or indirect causes.
This was certainly true in the case of crime statistics in the U.S.
at the end of 1989.
When a sudden drop in violent crime rates occurred, experts assumed that it had been caused by a mixture of tougher gun control laws, improved policing methods and increased spending on law enforcement and prisons.
However, later analysis showed that these elements only had a negligible impact on crime rates – whilst the factor which actually had the biggest effect wasn’t even mentioned at the time: abortions.
When Roe v Wade legalized abortion across America in 1973, women were suddenly able to terminate pregnancies due to poverty and single-parent households – two factors which are linked to future criminal behavior.
The result was a decrease in likely criminals who would otherwise have been 16 or over by 1989, thereby leading to an overall decline in crime rates thereafter.
This example shows why we need to be cautious about making snap decisions about causality based solely on obvious and immediate causes – as even experts can be wrong!
We should always look for more remote factors that might have played a bigger role than initially thought.
Wrap Up
Freakonomics is an incredible book that challenges conventional wisdom in order to examine how our everyday lives and decisions are impacted by incentives, the distribution of information, and irrational human biases.
When it comes to understanding and making decisions, it’s key to take into account hidden factors that are often overlooked or ignored.
The key takeaway from this book is to consider all aspects of a situation, including potential unintended consequences, when assessing incentives and their impact on yourself and others.
Additionally, explore information distribution in transactions between experts and laypeople, remembering that information is power.
Finally, recognize human bias – focusing on immediate causes rather than distant causes – when evaluating risk and causality.
