The next chapter aims to answer the question, "How is the Ku Klux Klan like a group of real estate agents?" Levitt begins by going into the history of the KKK, founded initially in the aftermath of the Civil War by six men doing harmless midnight pranks, and later evolving into a multi-state terrorist organization targeting emancipated slaves. Within a decade of its beginning, the Klan was extinguished, but restarted again by the 1920s, when it began targeting not only blacks, but also Catholics, Jews, communists, immigrants, and other minority groups.
While World War II caused the Klan to lie low for a while, it revitalized strongly after the war, with its headquarters in the city of Atlanta. There, Stetson Kennedy, a writer who was dedicated to ending bigotry, decided to go undercover and join the Klan in order to reveal its coveted secrets that might help lead to its destruction. He wormed his way into their ranks, learning all their secret customs, and eventually was invited to join the Klavaliers, who were the Klan's secret police.
By this point, the Klan was a lot less violent than it used to be, and carried out many fewer lynchings; instead, the real power of the 1940s Klan was their fear rhetoric. Kennedy realized the best way to take the Klan down was to expose their secret information to the world in whatever way he could, so he fed these important Klan secrets to a radio show listened to which many children listened, called "Adventures of Superman." Once everyone knew all this information, it turned into a tool for mockery, and Klan membership fell drastically.
Levitt attributes Kennedy's success to his understanding of the power of information. The KKK's power existed in the form of information, and once that information was exposed to the world, they lost the advantage they had from holding it. Similarly, after the advent of the internet, the price of term life insurance fell drastically because websites were created that allowed users to quickly compare the price of different policies. These websites dealt in the currency of information. The internet has served to balance out the possession of information, providing more to consumers than they previously had, but many experts are still able to use their informational advantage combined with other incentives like fear to rope consumers into a bad deal.
The next part of the chapter goes in-depth on the real-estate-agent problem discussed in the book's introduction. Since a real estate agent has much less to gain from an increase in the selling price of your house than you do, she will try to convince you that a low offer is actually worth taking, even if she knows the house could actually sell for more if she were to keep it on the market longer. In order to convince you to take this offer, an agent will use the informational advantage she has over you to induce fear. She may tell you that the housing market is tanking, or that a nearby house worth much more had a lot of trouble selling.
Real estate agents will also use different phrases in listings for the houses they are selling that convey large amounts of information to another agent or a savvy buyer. "Well-maintained," for instance, will sound like a compliment to the seller, but actually invites a buyer to bid low because it suggests that the house is old but not quite falling down. Specific words that are physical descriptions of the house itself are correlated with high selling prices—like "granite," or "maple"—as well as terms like "state-of-the-art." More ambiguous adjectives like "fantastic" and "charming" correlate to a lower selling price.
But this abuse of information is not limited only to experts. We selectively portray information about ourselves depending on the type of situation we are in. We will likely describe ourselves in a very different way during a job interview than we would during a first date.
The final segment of the chapter discusses whether or not people take pains to outwardly appear non-discriminatory in certain social situations, and whether this lack of discrimination is sincere or just a charade. The trivia game show The Weakest Link answers this question. Both blacks and women, two groups who are typically discriminated against, surprisingly are not discriminated against in this game: they are voted off at rates that correspond with their trivia-answering abilities. Levitt postulates that this is because, after the civil rights movement and the feminist movement, people do not want to appear like they are discriminating against these groups.
Instead, though, the elderly and Hispanics are discriminated against, suggesting that players are still discriminatory in some way. Economists propose two different kinds of discrimination: the first is taste-based discrimination, when one person discriminates because he prefers not to interact with a certain type of person. The other is information-based, when one person believes another type of person has poor skills and discriminates against them for this. On this game show, Hispanics suffer the latter, with the elderly suffering the former.
Further discrimination happens in the privacy of the home, specifically on internet dating sites. In their profiles, people overwhelmingly portray their looks as "above average." People also list whether they are looking for a match that is the same race as them, or if it does not matter. While the majority of white people said that race did not matter, they still send over 90% of their queries to other white people. This all proves that the information that people portray about themselves and the information that is actually true can be quite different.
While Chapter 1 focused primarily on the enormous role that incentives play in economic decision-making, Chapter 2 narrows in specifically on a phenomenon known as information asymmetry. Information asymmetry concerns interactions that take place where one party has more information than the other, such as when experts like real estate agents or car salesmen have more information about the product they are selling and the market they are selling it in than the buyer. Information asymmetry does not necessarily have to be abused, but it often is, as evidenced by the difference between real estate agents selling their own house versus selling a client's.
The abuse of information asymmetry is commonly associated with fear. Experts who have more information than buyers can use this to instill fear in consumers, who believe they may not be able to get a better deal elsewhere or that they need a certain product or service right away for whatever reason. But in certain social situations, this fear can be even more sinister, as evidenced by the Ku Klux Klan in the 1940s. Though the Klan themselves were rarely committing actual acts of violence in those days, they were able to use their informational advantage—all of the secrets about themselves that they knew, while others did not—to create an air of fear surrounding their group. Steston Kennedy demolished this fearful aura by eliminating the information imbalance between the KKK and the general public.
Information asymmetry is one of those phenomena that distance idealized economic models from the way economics works in the real world. Economic models like the supply and demand curve rely on both parties—the producers who supply and the consumers who demand—having perfect information in any given transaction, but this is not always the case. When information asymmetry exists and the consumer has imperfect information, both curves will shift and the equilibrium point (where the supply curve meets the demand curve) will change, resulting in an inefficient market outcome.
Levitt briefly talks about the internet entering the picture and leveling the economic playing field, becoming a great equalizer between consumers and experts and eliminating much of the information asymmetry that previously characterized transactions. This is an example of how technological change can affect the market. With the internet, consumers now have a wealth of information at their fingertips, and consumers who do adequate research before doing things like selling their house or buying life insurance are less likely to be taken advantage of by experts.
The final part of this chapter talked about a different side of the role that information plays in everyday life. This focused on selective information: by carefully choosing what information we share about ourselves, our preferences, and our transactions, we drastically influence the way others perceive us. The study examining online dating websites is the best way to see this in action. People have an overwhelming tendency to portray themselves as "above average" because it will affect the responses they get from others seeking matches. They are also likely to portray themselves as accepting by putting "it doesn't matter" for their racial preferences, but often instead show a discriminatory bias in the queries to which they actually respond to. Selective information influences our daily interactions, and is itself a form of information asymmetry.