Sunday, October 7, 2012

Freakonomics - Steven Levitt/Stephen Dubner, 2005

 Conclusions that appear to be intuitive/obvious are actually logical fallacies of the type cum hoc ergo propter hoc (correlation does not imply causation). Disproving such arguments is fairly common in some problems in the science/engineering fields, where the conventional methods of doing it are thorough theoretical methods such as regression analysis or via Monte Carlo methods, empirical measurements using:
  •  An identification of all factors that impact the results of an experiment
  •  Repeated experiments under controlled conditions,varying each parameter separately while keep all others constant.
These techniques are either not applicable or are inadequate to apply to problems in sociology/economics, especially the kind of questions that Levitt seeks to answer which involve incomplete/inaccurate quantitative data. Techniques and arguments used include deep studies/interviews, arguments of logic  (where data is unavailable) and cross domain collaborations with experts from other fields.

An outline of the work:
  •  Study of incentives and cheating (Chapter 1)
  •  Study of information and effect of information asymmetry (Chapter 2)
  •  Study of correlation vs. causation or how conventional wisdom is often wrong (Chapter 3/4/5/6)
Chapter 1: Incentives and Cheating
  • Incentive: Mechanism to induce one behavior (favored) over another (unfavored) by providing a reward
  • Cheating: Mechanism to defeat an incentive: acquire reward while performing (unfavored) behavior
  • Three types of incentives: Moral, Social, Economic
  • Any clever incentive scheme will result in the creation (or attempts to create an) equally clever cheating scheme
  • Some conclusions from case studies:
    • Approx 90% of humans do not attempt to cheat particular systems despite ability to do so (bagel experiment)
    •  Cross correlation analysis can be used very successfully to detect cheating (Chicago public education system, Sumo wrestling)

Chapter 2: Information
  • Information asymmetry; When two parties to a transaction have vastly different degrees of expertise
  • Internet has reduced information asymmetry
  • Often exploited (real estate agents, car salesmen)
    • Can be extremely subtle: Terms in real estate ads, selling cars
    • Some revealed through correlation analysis
  • Information crime
    • Crimes committed by exploiting information asymmetry (Enron)
    • Difficult to discover, something drastic must happen

Chapter 3/4: Correlation vs. causation (Conventional wisdom)
  • Convention wisdom (CW) can be incorrect in several cases.
  • Dramatic effects can be caused by subtle, overlooked, non obvious events
  • Events can be explained by careful study of the correct causes
  • Case studies demonstrating this include:
  • CW: Drug dealers make  a lot of money
    • Reality: The structure of a drug dealing organization is similar to a corporation
    • Workers at the bottom have low wages, bad working conditions
    • Upper management keeps disproportionate share of profits
  • CW: Crime decreased in the 90s for several reasons,
    • Correlations and logic used to check a number of likely causes
    • Closest correlation is with the Roe vs. Wade case and the legalization of abortion

Chapter 5/6: Case studies on parenting
  • Correlation between parenting approaches and the future success of children
    • A number of parenting factors are examined including those which show correlation (positive/negative) with child's success and those which have no correlation
    • All factors  appear to be correlated in some way to status of parents (education level of parents/affluence etc.)
    • What a parent does is irrelevant compared to who the parent is (education level/affluence etc.)
  • Correlation between children names and future success of children
    • Choice of name and success are uncorrelated, even though name choice has very strong correlation with race
    • There is a strong correlation between name choice and parents' characteristics (not childs' future)

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