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INSTRUCTOR’S GUIDE S. Clayton Palmer Adjunct Instructor Department of Economics

INSTRUCTOR’S GUIDE S. Clayton Palmer Adjunct Instructor Department of Economics Weber State University & Westminster College of Salt Lake J. Lon Carlson Associate Professor Department of Economics Illinois State University Prepared by and TO Welcome to the Instructor’s Guide to Freakonomics! Instructors of economics principles classes are constantly searching for material that brings currency and relevance to what is frequently perceived by students as a dry textbook. In particular, we try to find ways to show students that economic principles can be used to answer the social questions students care about. Freakonomics addresses current social questions; the questions that students argue about over coffee in the student union building.The book includes provocative chapter titles and often provides controversial answers, yet the analytical methods are purely quantitative and the social questions are addressed in a manner that illustrates the application of economic principles. Freakonomics provides clear illustrations of how an economist would approach a tricky social issue. Because most economists choose not to analyze these types of questions, the book is unique. This guide has been prepared for instructors who have selected Freakonomics as a supplement to accompany the microeconomics text they chosen for their economic principles classes.The material presented here is intended to assist instructors in incorporating the interesting and amazing information found in Freakonomics into their class discussions.As authors Levitt and Dubner explain: “Most books put forth a single theme, crisply expressed in a sentence or two and then tell the entire story of that theme: . . . this boasts no such unifying theme.We did consider . . .writing a book that would revolve around a single theme—the theory and practice of applied microeconomics anyone?—but opted instead for a sort of treasure-hunt approach.” The “treasure hunt” approach appeals to the casual reader, i.e., the “here’s-a-comfortable-couch,” read- er.This approach, and the subject matter chosen by Levitt and Dubner, make Freakonomics an excellent read for college students.This approach, however, makes it difficult to “line up” the tales in Freakonomics with the ordering of economic concepts in the typical text book.We’ve developed this guide as a “crosswalk” between Freakonomics and principles texts. In particular, we offer a brief summa- ry and outline of the material in each chapter, and we identify the economic concepts that are illus- trated by the stories in each chapter. Did we leave anything out? Oh yes, the book’s bizarre title.Well, we leave that to the authors to describe: “This approach employs the best analytical tools that economics can offer, but it also allows us to follow whatever freakish curiosities may occur to us.Thus, our invented field of study: Freakonomics.” Enjoy! S. Clayton Palmer J. Lon Carlson Adjunct Instructor Associate Professor Department of Economics Department of Economics Weber State University Illinois State University Westminster College of Salt Lake 2 Overview of Freakonomics: Themes and Fundamental Ideas Although, as the authors note, there is no single unifying theme the book is built around, we have identified a number of concepts that recur throughout the book. Positive vs. Normative Analysis Many of the tales in Freakonomics are intended to challenge the prior beliefs (i.e., the conventional wisdom) of university students and others.The conclusions derived from various investigations described in each chapter will surprise the reader.They may even irritate the reader’s sensitivities. The investigations in these chapters, perhaps like no other quantitatively-oriented book, bring home the differences between looking at the world from the point of view of a moralist and the world view of a scientist. If morality represents the way that people would like the world to work, economics represents how it actually does work. According to the authors: “it is well and good to opine or theorize about a subject, as humankind is wont to do, but when moral postur- ing is replaced by an honest assessment of the data, the result is often a new, surprising insight.” The Nature of Scientific Inquiry Freakonomics provides new insights into the scientific process.The investigations in Freakonomics universally address economic and social issues that are frequently difficult, but not impossible, to quantify.The means of formulating testable hypotheses, the difficulties involved in gathering useful data and the utilization of those data are testament to the discipline and creative mental processes of true scientific inquiry. Freakonomics provides concrete illustrations of how unconventional methods of data gathering and “stand-on-your-head” ways of looking at data are often necessary to make sense of the world. Knowing what to measure and how to measure it makes a complicated world less so. Incentives are the cornerstone of modern life Indeed, incentives have been the cornerstone of human existence. Economics is the study of human behavior as it manifests itself in the sometimes foggy mist of incentives.An understanding of incentives is the key to clearly understanding any human behavior. A related theme of Freakonomics is this:“Subject matter experts” of every color and stripe, from criminologists to real-estate agents, use the informational advantage they have acquired to serve their own agenda. The conventional wisdom is often wrong Freakonomics takes pleasure in using the powerful quantitative tools of economic inquiry to turn conventional wisdom on its head.The authors do not argue that conventional wisdom is always wrong, but they do conclude that the conventional wisdom that is used as an explanation for many social issues is unexamined, unquestioned and often not correct. Dramatic effects often have distant, even subtle, causes As the authors state:“the answer to a given riddle is not always right in front of you.” Of course, positive economic inquiry and gathering and interpreting the data that are necessary to solve a sticky social riddle is often hard. But it is the hard that makes it good! If it were easy, everyone would do it. 3 Chapter 1 What Do Schoolteachers and Sumo Wrestlers Have in Common? Summary In this chapter, Levitt and Dubner describe how many people in different cultures and walks of life, who are otherwise inclined to be honest, find subtle ways of cheating to advance their position or increase monetary awards when incentives are strong enough.The authors define an incentive as “a means of urging people to do more of a good thing or less of a bad thing,” and identify three varieties of incentives. Economic incentives are those which a person responds to in the market place (broadly speaking). Social incentives motivate people to respond in a certain way because they care (or are worried) about how they will be viewed by others (think “Scarlet Letter”). Moral incentives appeal to a person’s sense of right versus wrong.Three case studies of the effects of incentives dominate the chapter; public school teachers in Chicago, sumo wrestling in Japan, and Paul Feldman’s bagel business. The first case considers a group of ordinary people, school teachers, performing an ordinary task, testing their students. Recently, standardized testing has become mandatory in public schools.The No Child Left Behind law awards schools that make progress on these standardized tests and punishes schools that chronically lag behind. Levitt and a coauthor developed a computer algorithm to look for strings of suspicious answers on standardized tests.An analysis of data on the test scores of children in public schools in the Chicago Public School system reveals evidence that teachers cheat by substituting the right answers on students tests in about five percent of classes taught. Sumo wrestling in Japan, which is synonymous with Japanese national pride, is practiced by only the most honorable of men.Yet the data analysis described is this chapter provide evidence that a significant number of sumo wrestling bouts are actually “rigged” when it really counts. Finally, data collected by Paul Feldman, an entrepreneur who decided to start a bagel business in the Washington, D.C. area shows that people are not above cheating, even the gain is very low (95 cents for a bagel). Even more interesting is the observation that cheating appears to be more likely as the income level of customers increases. Chapter Outline I. The power, intrigue, and complication of incentives A. A day-care center learns a lesson in incentives B. Definition of an incentive and how incentives relate to the science of economics 1. Incentives are moral, social or economic 2. Trading a social incentive for an economic one–the day-care example C. How homicide rates have declined over the centuries–incentive induced? D. The power of incentives: the American Revolution 4 II. Cheating as a fallout of a set of incentives A. Who cheats? 1. Examples of CEOs, managers and tax-payers B. The example of Chicago public school teachers 1. Federal and state laws introduce “high stakes” standardized tests 2. Chicago Public School system embraces high stakes testing in 1996 a. The rewards a teacher reaps if students do better on tests b. Ways for a teacher to “pump up” his/her student test scores 3. Detecting cheating teachers a. Writing an algorithm to detect unusual answer patterns in students’ test scores b. Examining the data to detect cheating teachers i. identical strings of answers ii. comparing a student’s performance in one year against the previous year or uploads/Litterature/ freakonomics-instructorguide.pdf