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July 09, 2014

"[Part of a] Review of Levitt and Dubner's 'Think like a Freak'"

The full review is gated, but John Lott has posted an excerpt on his blog. Includes this terrific line about the incorrect story that the price of a new car drops by many $thousands as soon as it is driven off the lot:

Typically, Levitt and Dubner fail to understand that when a problem arises in a market, it generally provides an incentive for those involved to remedy the problem.

Comments

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Jack PQ

Steve Levitt's stock has fallen dramatically since he won the John Bates Clark medal. Programming errors undermining key published findings, or Nobel winner James Heckman seemingly comparing his work to cute New Yorker articles.

I don't always agree with John Lott, but here he hits a home run: people find solutions, especially if there is money to be made from doing so. People do not keep making stupid mistakes over and over. You can go back to the Coase Theorem for further support: if transaction costs are negligible, people always manage to reach the best outcome and so-called market failures dissapear. Of course government regulation could be seen as one kind of transaction cost.

Eric Falkenstein

Levitt's abortion argument was the main reason Freakonomics was so successful: there was a large constituency who wanted an empirical proof that abortion was good social engineering. Note when they went against the progressive conventional wisdom by downplaying climate change, the sequel tanked.

I think the best argument against the abortion argument was that while blacks partake most of abortion (per capita), the black/white crime rate ratio actually went up after the 'Roe generation' became of criminal age (~1989). Meanwhile, there are lots of omitted variables in their cross-state analysis they didn't include. So in other words, they did a neat empirical test, but didn't really do a good faith effort of correcting for omitted variables. I think abortion is if anything dysgenic because those with the foresight to anticipate not having the resources or will to nurture a child are on average better parents than those that notice a baby bump and treat it like something that just happens to them.

As for him being an out-of-the-box thinker, I sent a paper around 2006 to the JPE about my explanation of the low vol effect based on relative vs. absolute variance, a rather general-interest paper: if utility is relative, rather than in just wealth, that should be interesting to all economists and not just financial economists. He didn't even referee it, and said it was really a finance paper so I should send it to a finance journal.

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