CHAPTER 1 - WHAT DO SCHOOL TEACHERS AND SUMO WRESTLERS HAVE IN COMMON?

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  • The chapter begins with a common problem faced by many daycare centers around the world- parents repeatedly pick up their wards late- economists' solution-fine the tardy parents - results in more late pickups as the fine was only $3.
  • Before looking at why the solution failed - the author gives a brief explanation of incentives - he says economics is the study of incentives - how people get what they want or need, especially when other people want or need the same thing.
  • A good incentive scheme has three kinds of incentives: social, economic, and moral-for example, the government imposing a fine for smoking cigarettes is a social incentive, a restaurant banning cigarettes is an economic incentive, and the government spreading awareness that cigarettes benefit terrorists is a moral incentive.
  • Putting the daycare situation back into perspective, we can say it failed because the fine was too small and parents did not feel morally obligated to pay.
  • The use of incentives can also have a downside, especially if a moral incentive is given more importance than an economic incentive, which can lead to cheating.
  • According to Levitt, almost everyone cheats when the stakes are high, which he defines as getting more for less.
  • High-stakes testing, for example, was introduced in Chicago Public Schools with the goal of rewarding teachers if a student's performance improved while firing teachers if performance declined. 
  • Teachers cheated by either giving students extra time or mentioning the IMPORTANT questions after the test was completed, as a result of this testing method.
  • In more than 200 classrooms every year, teachers were found cheating. To catch these teachers, investigators looked for repeated patterns on students' answer sheets that showed a drastic increase in performance - a clear indication a teacher was altering the answer sheet.
  • It is a clear sign a teacher is cheating if a classroom of students gets all the hard questions correctly but fails to mark the easier ones. In contrast, a class with students who get most of the easy problems correct, but fail to answer the hard ones, indicates that the students have worked hard and improved.
  • To catch the teachers who were not faithful-a retest for 120 classes was organized.
  • The schools fired the teachers, which reduced the incentive for the teachers to cheat, resulting in a 30% drop in cheating the following year. 
  • Sumo wrestling is another example of cheating.
  • In the world of wrestling, there are six tournaments held a year, with each wrestler playing 15 matches. If a wrestler wins 8 matches, he moves up the ranking chart, if not he falls.
  • As a wrestler, these eight wins hold a great deal of incentive since they determine whether he is part of the elite group or not, whereas a wrestler who already has eight or more wins has little incentive.
  • So this leads to the rigging of some matches, mostly the ones having a 7-7 wrestler and an 8-6 wrestler which focuses on who loses the game than fixing who wins it.
  • This was proved by economists who studied various matches between 7-7 players and an 8-6 and found out that nearly 80% of 7-7 won the matches with 8-6 when they need to win but when a rematch with low incentives was initiated only 40% of 7-7 players won against 8-6 players hence proving that matches are rigged.
  • Yet another interesting piece of extract that reveals information about white-collar crimes is the story of Paul Feldman.
  •  Feldman quit his job to sell bagels through an honor system: provide bagels, put cash baskets around places in different companies, and then made a record of his business data. He had estimated that he would get a 95% profit back; however, when it came down to it he got way less of what he predicted! What occurred was the lack of consequences encouraged those who used dishonest means because they weren't in contact with Feldman or could see him face-to-face.
  • There are a lot of factors that can lead to theft or dishonesty such as anonymity, personal satisfaction (a person's mood), and even weather conditions.
  • For instance, small offices did appear more honest than bigger corporations (possibly because they don't want others watching). Also, nice weather made more people want to pay for the items instead of attempting theft in contrast it was the opposite during bad weather like a rainy day.
  • And so while many stole from him here or there over time, most paid or donated something; because even if they morally object sometimes monetary incentives change everything.
Economics is a fascinating subject because it touches on almost every aspect of life. This makes it a very broad field, but also a very challenging one. If you want to get a good understanding of economics, then you'll need to spend some time reading about it. You can start by looking at these book summaries and recommendations.

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