TCS Daily


In Defense of Freakonomics

By Pejman Yousefzadeh - July 12, 2005 12:00 AM

I usually find myself in agreement with the analysis provided on a whole host of topics by the inimitable Arnold Kling. But I have to take issue with his critique of the book Freakonomics by University of Chicago economics professor Steven Levitt and writer Stephen J. Dubner.

Kling addresses Levitt's and Dubner's findings that real estate agents are more likely to push you to sell your house quickly rather than wait for a better offer while the agents themselves are willing to leave their own houses out on the market longer in order to make a better sale. Kling points out that in many cases, "buyers are liars" and that "experienced real estate agents filter out the liars," thus allowing the seller to collect out of good faith deposits placed by buyers who don't eventually consummate the sale. Thus, Kling critiques Levitt's and Dubner's arguments by saying that "if you want to measure the benefit of using an experienced real estate agent, don't just look at transaction prices. Compare the number of deals that fall through."

This is all valuable information, but it does not necessarily cancel out the value of Levitt's and Dubner's analysis. It remains highly worthwhile to know things that one previously did not and many people do not know that real estate agents do not have a significant economic incentive to keep a seller's house on the market all that long because the additional commission is simply not worth the effort -- even when that means the seller loses out on a significant amount of money in the final sales price. It is equally worthwhile to know that real estate agents themselves engage in dramatically different tactics to get higher asking prices for their houses, to know of the buzzwords that are used in real estate advertisements to subtly encourage potential buyers to either bid high or low on the price and to know the many different methods -- some subtle and some not -- that real estate agents use to encourage their clients to act in accord with the agents' own economic interests and sometimes less in accord with the interests of the clients themselves.

Of course, nowhere in the book do Levitt and Dubner tell the reader "Don't use real estate agents when selling your house!" And Kling's "buyers are liars" analysis is useful in analyzing the utility of real estate agents. But as Levitt and Dubner note in their book, experts in a particular field are the overwhelming beneficiaries of the phenomenon of "information asymmetry," where one party in a transaction knows more -- oftentimes, much more -- than the other party. We face the negative consequences of information asymmetry when we interact with car dealers, mechanics, doctors, lawyers and -- yes -- real estate agents. This is not to say that your car dealer, mechanic, doctor, lawyer or real estate agent is necessarily dishonest. But it does mean that the possibility exists that you might suffer from being on the short end of the information asymmetry stick. Levitt and Dubner help even the odds with their discussion of the hidden economic motivations of real estate agents.

Kling also argues that oftentimes, sellers sell quickly because they are "under the gun" while real estate agents sell homes for "trade up" reasons and thus have the luxury of keeping their houses on the market longer in order to get a higher price. But Kling does not address the data -- or the argument that flows from the data -- demonstrating the economic incentive for the real estate agent to make a quick sale instead of working harder for a commission that, while bigger, would not be big enough to justify all of the extra work involved in keeping a buyer's house on the market longer. Specific instances of agent chicanery are found in Freakonomics. Levitt and Dubner tell the story of one real estate agent who was so anxious to sell a house and get a commission that the agent openly advised the buyer to underbid -- promising the buyer that the seller was willing to sell the house "for a lot less than [the buyer] might think." Result: the seller ended up selling for at least $20,000 less than the buyer was prepared to bid before speaking with the seller's agent. This is an anecdote but it reflects a larger trend in the data that Levitt and Dubner present.

Kling also argues that Freakonomics "jumped from topic to topic" and that ultimately, it suffered from the supposed tendency of the authors to "pass judgment" on particular issues instead of pointing out that "more study needs to be done." With all due respect to Kling, I find this critique bizarre. The topics addressed in each chapter have a unifying theme that holds them together. In addressing these topics, Levitt and Dubner address their macro themes from different, yet related perspectives. There is no accounting for taste, of course, and perhaps Arnold Kling would have preferred or employed a different writing style. But while a number of specific topics were discussed in each chapter, all of those topics had a particular pedagogical message connecting them.

As for the critique that Levitt and Dubner "passed judgment," Freakonomics entails no more a passing of judgment than does any other book that brings to the fore specific and novel arguments. Nowhere in their writings do Levitt and Dubner declare the subject closed on the topics they discuss. But they do present data that disrupts conventional wisdom on a wide variety of issues and it should perhaps come as no surprise that the book is presented as an argument designed to persuade adherents of conventional wisdom. That does not entail foregoing any further debate on the subjects of the argument and Levitt and Dubner do not say or hint to the contrary. Indeed, the value of Freakonomics is that it encourages further debate and econo-sociological analysis on the subjects it covers and on other subjects as well.

By asking good questions, bringing keen tools of economic analysis to the table and by using those tools to valuably disrupt the conventional wisdom with startling and fascinating sociological findings, Steven Levitt and Stephen Dubner have made "the dismal science" far less dismal. No one says that Freakonomics is the definitive book on "how economics ought to be done." It is, however, a book that presents a different way in which economics can be applied and we should recognize that "freaky" achievement for the highly positive development that it is.

The author is a lawyer. Find more of his writing here.



 

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