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Data Is the World

And what a Freakonomics world it's become. Extracting business lessons from Steven Levitt's bestseller.

So here we are with this summer's reading-list phenomenon: Freakonomics, the "business book (quotation marks necessary) most likely to have found its way into both your vacation luggage and those conversations we all end up having while picking at our bagels and waiting for meetings to start. It's the book that will keep you in cocktail-party material for a year, and by the time you're reading this, you very well might have seen its economist co-author, Steven D. Levitt, on TV often enough to think he's a summer replacement series. And the question—one of the questions—is, Why is this the one? Why this book, why these ideas, why now? As always, you can't help wondering what it says about business that this is what the marketplace was hungry to embrace.

But that question will have to wait a moment, as will the question about exactly what management lessons Freakonomics offers to entrepreneurs. Because there's really only one place to start any discussion of Freakonomics (subtitle: A Rogue Economist Explores the Hidden Side of Everything), and that's with the controversial claim that is responsible for all those TV appearances. The claim is: Nothing fights crime like abortion.

The story of abortion's relationship to crime—and a story is exactly what it is in the hands of Levitt and his co-author, journalist Stephen J. Dubner—is only one of dozens of stories included in the scarcely 200 pages of Freakonomics. And like a lot of the stories, it first appears to have little relevance to management. The management insights that Freakonomics yields have less to do with the subjects Levitt digs into than with the way he digs into them. A celebrated economist, he uses the analytical tools of his science to read the world more accurately. He is a seeker of truths, however uncomfortable. As he and Dubner write: "Morality'¶represents the way that people would like the world to work—whereas economics represents how it actually does work.

Levitt's gift is to find cause and effect in data. "I like to explain how people get what they want, he says. Which inevitably leads him to thinking very hard about such things as incentives, the flagrant wrongness of so much conventional wisdom, and the overriding challenge of figuring out what to measure and how to measure it so that a complicated world adds up. Now what company builder couldn't profit from a little of that kind of juju?

Levitt made the crime-abortion connection the same way he makes all his connections—by assuming nothing and asking questions, including some questions that are oddball or taboo. The crime story, in capsule form, goes like this: By the end of the 1980s, crime was at an all-time high and had become the country's scariest social problem. Violent crime in particular had climbed 80% in 15 years. Experts predicted worse horrors to come.

Then, astonishingly, the precise opposite occurred. From the early '90s on, crime plummeted. By 2000 the murder rate had reached a 35-year low. Murders in New York City alone dropped from 2,245 in 1990 to 596 in 2003. And the experts, of necessity, retrenched. They explained the turnaround by citing factors we all came to accept. Innovative policing practices were especially lauded, as were gun control measures and the ripping '90s economy. Trouble was, Levitt's analysis showed, each of those explanations was wrong. It turned out that the greatest contributor to the change, by far, was the 1973 U.S. Supreme Court decision in Roe v. Wade, which legalized abortion nationwide.

There isn't room here to walk through Levitt's layer-by-layer analysis. But the gist of abortion's influence is simple: "The millions of women most likely to have an abortion in the wake of Roe v. Wade—poor, unmarried, and teenage mothers for whom illegal abortions had been too expensive or too hard to get—were often'¶the very women whose children, if born, would have been much more likely than average to become criminals. But they weren't born, "and years later when they would have entered their criminal primes, crime rates dove. Exhaustive data enabled Levitt to reduce the finding further: "Legalized abortion led to less unwantedness; unwantedness leads to high crime; legalized abortion, therefore, led to less crime.

When Levitt first revealed his findings, he was vilified, labeled an idealogue, a eugenicist, a racist, and worse—this despite his explanation that he had no interest in moral "right or "wrong. His only aim was to uncover what happened. Based on Freakonomics and the unusually good website Levitt and Dubner maintain (www.freakonomics.com, where in a blog Levitt links to critiques and seriously addresses their merits), I think he did.

But if I'm a CEO, that's not what I most care about. I want to know what Levitt's data-reading trick might tell me about my company and market, and what he thinks I should know about "how people get what they want.

So I called him up. I asked him to list some lessons.

"But I'm not a business guru, Levitt immediately demurred. "Except for two years as a consultant [after college], I really don't know anything about how to run a business. Doesn't matter, I said. With big-ticket speeches and corporate meetings already booked, he was about to be banked on for advice regardless; we're not a nation that chooses its gurus with care. And besides, in both book and conversation, Levitt makes some practical points:

  • Use your data. "Companies aren't taking advantage of the data they generate, Levitt says. "Often, data generated for one purpose is useful for another. Freakonomics describes the case of an entrepreneur selling bagels in corporate offices who kept meticulous records to track profits and loss—data that eventually yielded insights about white-collar crime and the effects of office size on honesty.
  • Ask different questions. The abortion-crime link revealed itself when Levitt thought to stop asking what made crime fall and try asking why it had risen so much in the first place. That led him to justice system practices in the 1960s, which led him to a statistical understanding of which individuals were likeliest to commit crimes, and ultimately to the question of why a large segment of that population seemed to have vanished.
  • Don't mistake correlation for causality. Innovative policing and a drop in crime happened simultaneously, but data proved the one didn't cause the other. (Be mindful of the feudal king who, having learned disease was greatest in regions with the most doctors, figured that reducing doctors would reduce disease.)
  • Question conventional wisdom. An idea that is both easy to understand and a source of comfort (such as the credit quickly given to innovative policing for cutting crime) should be especially suspect.
  • Respect the complexity of incentives. "You can't imagine, says Levitt, "all the ways humans will connive to beat a system.
  • Employ data against cheating. Just as companies don't sufficiently capitalize on the data they have access to, they aren't exploiting what Levitt calls "opportunities to think about fraud or theft in their businesses.

Freakonomics describes how data alone identified cheating in institutions as varied as school teaching and sumo wrestling. (Levitt, long fascinated by all manner of wrongdoing, believes he's nailed down corruption in horseracing, too.)

You get the idea. Data is the world; make it your friend. Even if for the rest of us it's harder to parse than Levitt always understands.

Among the data sets Levitt himself hasn't yet parsed is the one measuring Freakonomics' reception. Levitt was as shocked as anyone by the book's—and his—sudden popularity. He does, though, have an incipient theory about why this book and these ideas have attracted an audience.

"I think there's a grudging respect for economists that's tinged with dislike, he says. Then along comes Freakonomics, seeming to suggest, as Levitt says, that "what economists do isn't magic. You don't need to know a lot of math; I'm terrible at math. You can still look at the world like an economist. Also, he believes, people are intrigued by the kinds of quirky questions Freakonomics asks, the kind that don't sound like they belong in a book by an economist. "And people just like good stories, he says. Maybe it's the stories, he thinks, that more than anything account for the book's success.

I don't think so. Indeed, Freakonomics is a marvelous entertainment, a series of puzzles that a reader gets to explore alongside a companion whose voice is jaunty and clear (sometimes too clear; even Levitt would probably concede the world is grayer than his concise book portrays). But the strongest appeal of the stories isn't so much in their telling as in their seamless resolution, the way they land so reliably on an answer. We love answers. In Freakonomics Levitt eviscerates one wrongly drawn conclusion after another, each of them at least partly arrived at and accepted in the first place because the human desire for answers is so great. That desire, Freakonomics implicitly argues, is dangerous—it'll trip up your head and lead you astray. Yet it's that same desire that makes Freakonomics taste so delicious.

And Levitt and Dubner know it. What matters, Dubner writes, is "Levitt's underlying belief: that the modern world, despite a surfeit of obfuscation, complication, and downright deceit, is not impenetrable, is not unknowable.... All it takes is a new way of looking.

Wouldn't it be pretty to think so.

Michael S. Hopkins, an Inc. editor-at-large, has written for the magazine since 1987.

Last updated: Aug 1, 2005

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