If you find the study of economics and finance is best suited as a treatment for insomnia rather than pleasurable reading on a relaxing Sunday night, then you’re like most people. As it turns out however, finance and economics doesn’t have to be dry or boring, it just has to be approached the right way, which is why the authors of Freakonomics: A Rogue Economist Explores the Hidden Side of Everything have been so successful. Not only have they made a complex and sometimes painful topic accessible to many, but they have done so in such a way that is actually interesting and often entertaining.
Think Like a Freak takes this one step further: It teaches valuable thinking skills in how to think about things from an economics standpoint, which is actually quite important. I have previously read other books on economics and finance – some of which I agree with and some of which I think are magical fairytale thinking. I have also previously read a number of books that teach various aspects of general thinking skills such as Serious Creativity: Using the Power of Lateral Thinking to Create New Ideas and De Bono’s Thinking Course, Revised Edition both by Edward do Bono, The Confident Decision Maker: How to Make the Right Business and Personal Decisions Every Time by Roger Dawson, and others (all of which are recommended reading). The first of these teaches concrete techniques anyone can use to increase creative idea output, the second provides many analytical thinking tools, and the latter provides many good techniques for making well reasoned and analytic decisions. With that said, what I find unique about Think Like a Freak is that it bridges the gap between teaching generalized thinking skills (such as the books above) and specifically teaching about how to think about economic problems (as most economics and finance books do). As I was listening to this audiobook I regularly found myself exclaiming “Yes! Exactly!”.
One criticism I have encountered about the Freakonomics books is that much of what the authors write about is not purely economics, in the sense of supply and demand and money and interest rates, etc. That may be a valid criticism, but it also misses the point in an important way. The authors are attempting to apply many of the thinking tools used in economics to a broader set of human behaviors and problems, which may at times bleed over into areas more traditionally associated with social-psychology and philosophy. So the real question is not whether their work is “pure” but rather “is it useful?” In this reviewers opinion, it is indeed, and not only useful, but unusually entertaining in the process.
There are numerous good points in this book, but I will try to summarize the top 22 key ideas that I took away from it. Several of these may seem like common sense, but the authors do a good job of explaining why many of these are not quite as simple as they first appear on the surface.
- Incentives always matter in driving human behavior.
- If the incentives around a given subject are structured correctly, it will produce desired, constructive behavior. If the incentives are structured incorrectly, it will produce undesirable or destructive behavior. If the results in a particular area are poor, then that is a sign the incentive structure is wrong.
- It is difficult to get incentives structured correctly, and is more difficult than one might imagine. Humans are clever and will find workarounds. Erroneous incentives can have unintended consequences.
- The motivations (or incentives) that people state are often not their real motivations or incentives in practice. The authors describe this as “stated motivation” and “observed motivation”. This makes figuring out people’s true motivations difficult (there are many things that motivate people differently). This also makes structuring incentives that much more difficult. For example, a good employee might state she is leaving a job for better pay (which is a problem that could easily be solved by higher pay), when in reality the employee is leaving because she does not find her work meaningful and dislikes working for a morally bankrupt corporation (a problem that cannot be solved easily).
- Don’t be afraid to say “I don’t know.” It is very common for people to not be willing to admit that they don’t know something. They either try to “fake it” or else are overconfident and think they know more than they actually do. Both of these approaches tend to lead to poor results, when much better results could be achieved by simply starting from the blank slate of “I don’t know”.
- We all think we “know” things. Some of those things are certain and concrete and some are more vague. The further away we are from an event or subject, the less we actually have any good understanding of it. This is particularly true when we are getting information about the subject second hand. (“I heard about it on TV” doesn’t necessarily mean it is true or accurate.) Sometimes what we already “know” gets in the way of finding out the real facts.
- Think like a child. This has several parts. First, children are much better at admitting “I don’t know” than are adults. Second, children are naturally curious and are constantly trying to figure out and understand how the world works, while adults tend to become complacent in their understanding of how things work. Finally, children have fun. The authors point out that it makes no sense to have career where you don’t enjoy what you do, because not only would you be miserable, but because a person is less likely to exceed at doing something they don’t enjoy.
- How you frame a question or problem will produce different answers or results. If you ask the wrong question you will get the wrong answer. Sometimes having the “right” questions is more important than having answers. If you “reframe” a question or ask it in a new way, it leads to different answers. If you redefine a problem that can show you different solutions. The authors use one example of how a hot dog eating champion revolutionized the way hot dog eating contests are done, by shifting his question and thinking from “how do I eat more hot dogs?” to “how do I make eating hot dogs easier?” This may seem like an odd example, but the authors use such odd examples to keep the book interesting, and at times, downright funny.
- How you measure outcomes is important. If you are measuring the wrong outcome metrics, you will not be able to determine if your actions or incentives are producing the desired results. Similarly, if you need to make sure that the metrics you measure are aligned with the incentives and behaviors you want to encourage. If behaviors and incentives are not aligned with the metrics you are measuring, people can “game” the results to achieve the rewarded metrics, but can do so by bypassing the truly desired outcomes. For example, in public education, standardized tests are a common metric. Teachers have started to “teach to the test” to get the incentivized results of better standardized test scores. But as it turns out, “teaching to the test” often does not translate into real world knowledge or skills in the students. So while the measured outcome of standardized test scores is achieved, the truly desired goal of teaching kids knowledge and skills that they can actually apply in real life is not achieved. This is a classic example of an outcome where what is being measured is not aligned with the desired outcome.
- If a problem has been around for a long time, it is probably because it is a very difficult and complicated problem, otherwise it would have already been solved.
- Sometimes it is easier to break a big problem into smaller problems, and not try to solve the big problem, but just solve one small problem at a time. The authors use an example of a Chinese research group that significantly increased struggling students’ grades by doing simple (and inexpensive) vision screening tests and getting many of them eye glasses so they could actually see what they were being taught. There are many things that can contribute to kids performing poorly in school – it is a complicated problem. But this was one way a small chunk of that big problem could be broken off and solved.
- Measuring or evaluating cause and effect relationships in the real world is very difficult, because reality is very complex. There are many variables that could affect an outcome, and often relationships exist that we do not expect.
- “Predictions are hard, especially about the future.”
- Finding the root cause of problems can be difficult. Providing simple, straight forward, linear “solutions” to highly complicated nonlinear systemic problems is no solution at all – if the underlying root causes of the problem are not addressed. “A bucket of cash will not cure poverty and a planeload of food will not cure famine.”
- The cost of solving problems that aren’t really problems is very high.
- “Philanthropy is the most dysfunctional $300 billion industry in the world.” “Never, ever think that people will do something just because it is the ‘right’ thing to do.”
- Everyone needs to understand game theory. (Explaining it is beyond the scope of this review.)
- The evidence shows us that most people are gullible, but few people think that they are.
- The evidence also shows us that people tend to put ideology ahead of logic/reason and facts in their decision making processes.
- Be aware that the sunk-cost phenomenon can lead to costly poor decision making. Cut your losses to avoid more loss, and to pursue better opportunities.
- If something doesn’t work, it is not a “failure” – it is a useful learning experiment that helps determine what will not work.
- “The $1 million dollar question: when to struggle and when to quit.” I will encourage you to read the book to find out the answer.
These are just the key points I got out of it. There is much more to this book than what I could possibly cover in this book review.
Even if you don’t find economics or human thinking and behavior interesting, you should read this book for a variety of important reasons. The authors make it a fun and entertaining to read (or listen to), even if this is not your first choice of subject matter. More importantly, this book gets you to think about and question how the world actually works (does x really cause y, or is it just correlation? Or does y really cause x?), which is also directly applicable to anyone who works in the sciences, or sometimes even in business. It also provides tools for thinking about how we might approach solving many societal and economic problems, in relatively non-painful ways. And that is something we can always use more of.
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