Excerpt from Freakonomics by Steven Levitt, Stephen J. Dubner, plus links to reviews, author biography & more

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A Rogue Economist Explores the Hidden Side of Everything

by Steven Levitt, Stephen J. Dubner

Freakonomics by Steven Levitt, Stephen J. Dubner X
Freakonomics by Steven Levitt, Stephen J. Dubner
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  • First Published:
    Apr 2005, 256 pages
    Apr 2006, 256 pages

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There's one way to find out: measure the difference between the sales data for houses that belong to real-estate agents themselves and the houses they sold on behalf of clients. Using the data from the sales of those 100,000 Chicago homes, and controlling for any number of variables -- location, age and quality of the house, aesthetics, and so on -- it turns out that a real-estate agent keeps her own home on the market an average of ten days longer and sells it for an extra 3-plus percent, or $10,000 on a $300,000 house. When she sells her own house, an agent holds out for the best offer; when she sells yours, she pushes you to take the first decent offer that comes along. Like a stockbroker churning commissions, she wants to make deals and make them fast. Why not? Her share of a better offer -- $150 -- is too puny an incentive to encourage her to do otherwise.

Of all the truisms about politics, one is held to be truer than the rest: money buys elections. Arnold Schwarzenegger, Michael Bloomberg, Jon Corzine -- these are but a few recent, dramatic examples of the truism at work. (Disregard for a moment the contrary examples of Howard Dean, Steve Forbes, Michael Huffington, and especially Thomas Golisano, who over the course of three gubernatorial elections in New York spent $93 million of his own money and won 4 percent, 8 percent, and 14 percent, respectively, of the vote.) Most people would agree that money has an undue influence on elections and that far too much money is spent on political campaigns.

Indeed, election data show it is true that the candidate who spends more money in a campaign usually wins. But is money the cause of the victory?

It might seem logical to think so, much as it might have seemed logical that a booming economy in the 1990s helped reduce crime. But just because two things are correlated does not mean that one causes the other. A correlation simply means that a relationship exists between two factors -- let's call them X and Y -- but it tells you nothing about the direction of that relationship. It's possible that X causes Y; it's also possible that Y causes X and it may be that X and Y are both being caused by some other factor, Z.

Consider this scenario: cities with a lot of murders also tend to have a lot of police officers. Let's now look at the police/murder correlation in a pair of real cities. Denver and Washington, D.C., have about the same population -- but Washington has nearly three times as many police as Denver, and it also has eight times the number of murders. Unless you have more information, however, it's hard to say what's causing what. Someone who didn't know better might contemplate these figures and conclude that it is all those extra police in Washington who are causing the extra murders. Such wayward thinking, which has a long history, generally provokes a wayward response. Consider the folktale of the czar who learned that the most disease-ridden province in his empire was also the province with the most doctors. His solution? He promptly ordered all the doctors shot dead.

Now, returning to the issue of campaign spending: in order to figure out the relationship between money and elections, it helps to consider the incentives at play in campaign finance. Let's say you are the kind of person who might contribute $1,000 to a candidate. Chances are you'll give the money in one of two situations: a close race, in which you think the money will influence the outcome; or a campaign in which one candidate is a sure winner and you would like to bask in reflected glory or receive some future in kind consideration. The one candidate you won't contribute to is a sure loser. (Just ask any presidential hopeful who bombs in Iowa and New Hampshire.) So front-runners and incumbents raise a lot more money than long shots. And what about spending that money? Incumbents and frontrunners obviously have more cash, but they only spend a lot of it when they stand a legitimate chance of losing; otherwise, why dip into a war chest that might be more useful later on, when a more formidable opponent appears?

The foregoing is excerpted from Freakonomics by Steven D. Levitt and Stephen J. Dubner. All rights reserved. No part of this book may be used or reproduced without written permission from HarperCollins Publishers, 10 East 53rd Street, New York, NY 10022

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