Monday, November 05, 2007

I'm reading the book I bought Nathan for his birthday, Freakonomics.
It's awesome! He is starting to wonder who I bought the book for.

It's so good, I wanted to share what I am reading...

The book has three main underlying themes:
1. Incentives are the cornerstone of modern life
2. The conventional wisdom is often wrong
3. Dramatic effects often have distant, even subtle causes

This short excerpt from the book, focuses on the first theme.

Freakonomics begins by asking readers to imagine the are managing a day care centre.
The policy clearly states that parents are to pick up their children by 5pm.
But parents are often late.
What should you do about this dilemma as manager?
Well, a pair of economists offered a solution. Fine the late parents.
Why should the day care centre take care of these kids for free?
The economists tested their solution by studying 10 day care centres.
The study lasted 20 weeks.
The fine was not implemented immediately.
For the first few weeks, the economists recorded data on the number of late pick ups.
On average, there were 8 late pick ups per week, per centre.
In the fifth week of the study, the late fee was introduced.
Any parent arriving more than 10 minutes late, would be subject to the fee.
The fee was set at 3$ per incident.
After the fine was enacted what do you think happened?
Parents smartened up and picked their kids up on time?
In fact, it was the opposite.
Before long, there were as high as 20 late pick ups per week, per centre.
More than double the original average.

Economics is the study of incentives.
Incentives regulate responses, both positive and negative.
For example, if I score a goal in soccer, my dad will give me 5$, but if I don't clean my room, I get grounded for the weekend. My actions are now based on those financial and social incentives.

If an incentive is a means of urging people to do more of a good thing and less of a bad thing.
Why didn't this incentive work?

It is because there are three main categories of incentives: social, economic and moral.
The Freakonomics book goes into more detail here, that is worth the read...

In the case of the day care centre, the 3$ tax was too small for a financial incentive.
For that price, parents could afford to be late every day, paying only 60$ extra per month.
As far as baby sitting goes, that is pretty cheap.
But there is a second problem.
The economists substituted an economic incentive *the 3$ fine* for a moral incentive *the guilt parents are supposed to feel when they are late*
For just a few dollars each day, parents could buy away the guilt.
Furthermore, the small size of the fine gives the impression that late pick ups are not that big of an inconvenience in the first place.

In the seventeenth week of the study, the fee was eliminated.
However, the number of late pick ups remained consistent at 20 per week.
Now parents could arrive late, with no fee and feel no guilt.

There is more to come I am sure.
The next few chapters are entitled:
What do school teachers and sumo wrestlers have in common?
How is the Klu-Klux-Klan is like a group of real-estate agents?
Why do drug dealers still live with their moms?
What makes a parent perfect?

I'm excited to keep reading...

posted by Rachel Pede @ 3:44 PM   1 comments