Think Like a Freak

This is the same as sunk-cost fallacy. The name comes from the Concorde airplane, which was developed and operated jointly by the British and French governments. The project operated at a loss, but the two governments continued to support it because they had already spent billions of dollars on it, which they felt would be a total waste if they gave it up. This is a concrete example of how people often continue pursuing failed ventures out of fear of wasting time and effort.

This term is used when talking about incentives. Many times people say one thing and do another; for various reasons, they don’t admit what truly motivates them. Social scientists use the phrase “declared preferences” to refer to what people say. An example is the study discussed in Chapter 6 having to do with energy conservation in California: The reasons people gave for conserving energy were different from the reason they actually did it.

This term is derived from the term Freakonomics, the name Levitt and Dubner use in their series of books of which this is one. They never actually define it in this book, but it describes someone who follows their approach to analyzing and solving problems. This means, among other things, someone who uses big data, thinks rationally without bias, and recognizes the power of incentives. But more than that, a Freak is someone who thinks creatively, often from a different angle than others; who likes to have fun in their work; who tries to view things with the fresh eyes of a child; and who isn’t afraid to fail. The closest the authors come to a definition is the following:

The modern world demands that we all think a bit more productively, more creatively, more rationally; that we think from a different angle, with a different set of muscles, with a different set of expectations; that we think with neither fear nor favor, with neither blind optimism nor sour skepticism. That we think like—ahem—a Freak (8).

Levitt and Dubner define this simply as “the art of beating your opponent by anticipating his next move” (142). By doing this, you can help shape outcomes by encouraging or discouraging behaviors. The authors admit that game theory has not lived up to its initial hype because the world proved too complicated, but it can still be effective on a smaller scale. One application is in finding people who don’t want to be found (or revealing behavior that they try to conceal). An example is the “M&Ms clause” that David Lee Roth put into Van Halen’s contract with venues hosting the band’s concerts. If the venue failed this test, there was a good chance it hadn’t paid attention to more important details like properly setting up and supporting the performance equipment.

This is the tendency of people to do what others do, to follow their behavior. Though people don’t like to admit it, this often exerts a strong influence on their motivations for doing something. As the authors assert, “It influences virtually every aspect of our behavior—what we buy, where we eat, how we vote” (115).

This word is used extensively throughout the book and is discussed in depth in Chapter 6. An idea that is central to economics, an incentive provides motivation for doing something and encourages or discourages a particular behavior. The authors state that incentives can be financial, social, moral, or legal, and play a big part in thinking like a Freak. They can be tricky, however, in that they don’t always work the same way with everyone and may not work the same way over time. Incentives can even backfire and have consequences that are unintended—even directly opposite to those desired. An example of this is the cobra effect.

This is the cost of not doing one thing because you are spending time on another thing. It is related to the idea of sunk costs. Let’s say you are engaged in Project A, which takes a certain amount of time and money. This prevents you from putting that time and money into Project B. If A is not productive, you are missing the opportunity to work on B, which may be more productive. Levitt and Dubner argue that this opportunity cost must be factored into any decision whether to continue or quit doing something.

This refers to a kind of savings account that runs a bit like a lottery. People put their money in one of these interest-bearing accounts and agree to pool a fraction of the interest with others. Periodically, a lottery is held in which one of the account holders wins the pooled interest. It is sometimes called a “no-lose lottery” because even if they don’t win the pooled amount of interest, each account holder retains the majority of the interest that is earned on their account. The authors refer to it as an example of using the proper incentives to encourage beneficial behavior. People like playing the lottery because it’s fun; however, it’s a terrible investment and people lose a lot of money in it. (Americans spent $60 billion a year on it at the time the book was published.) By harnessing the format of a lottery, PLS accounts can help people use their money more responsibly.

The opposite of declared preferences, this term refers to reasons why people actually do something. Research can reveal true motivations (hence the name), which are sometimes the opposite of what people say motivates them. In the example of energy conservation in California, a study showed that following the behavior of one’s neighbors (herd mentality) was the greatest motivation for conserving energy—despite that being the least important reason when ranked by the same people in a survey.

This term means just what the name implies: a preference for the status quo, namely for not changing things. People often prefer to keep going with something they’ve already begun, whether or not doing so really makes sense. The authors cite it as one of the main factors that prevents people from quitting things.