This chapter will answer the question, "What do schoolteachers and sumo wrestlers have in common?" It begins with a story about a pair of economists who tried to find a solution for tardy parents who repeatedly come late to pick up their children from daycare. They decided to try fining parents, adding a $3 fine for each child when a parent showed up more than ten minutes late. Unfortunately, though, after this fine was instated, the number of late pickups only went up.
Before explaining why this happened, Levitt segues into an in-depth discussion of incentives. He defines them as the way people get what they want or need, especially when other people want or need the same thing. We learn to respond to incentives from a young age, such as rewards for studying hard and getting good grades, and punishments for bad behavior.
There are three kinds of incentives: economic, social, and moral, and often incentive schemes will include all three of these. Levitt uses crime as an example: why don't more people commit crimes? Because there exist economic incentives—being jailed, losing your house, being fined—that stop us from doing so, as well as moral incentives, like the refusal to do something morally wrong, and social incentives–we do not want others to see us doing something wrong. These types of incentives are how society attempts to mitigate crime.
Before continuing, Levitt backtracks to the daycare study and explains that the incentive of $3 was too small, and, furthermore, putting such a small price tag on the inconvenience of a late pickup absolved parents of the moral guilt they felt for showing up late.
Continuing with the discussion of incentives, Levitt next examines the incentives that cause people to cheat, which he defines as getting more for less. The first example of cheating is an anecdote about high-stakes testing at Chicago public schools. Since public schools with low test scores risked being shut down and teachers with low test scores can be passed over for promotions or even fired, many teachers had incentives to cheat and inflate their students' scores, whether by providing them with answers or even changing their answers after the students finished the test.
In order to catch cheating teachers in the Chicago public school system, investigators looked for repeated patterns of letter answers on students' answer sheets in classrooms that had experienced a dramatic spike in test scores from the previous year, a sign that the teacher had possibly been cheating by changing her students' answers before handing in the answer sheets. Using this cheating algorithm, they revealed evidence of teacher-cheating in over 200 classrooms per year. The cheating teachers were likely to be younger and less qualified; they were particularly likely to cheat after their incentives changed, such as when high-stakes testing was introduced. After a retest was administered, enough evidence was gathered to fire many of these cheating teachers.
Similar cheating can be seen in athletics, particularly in the Japanese sport of sumo. The incentive scheme in sumo is extremely powerful, since a sumo wrestler's ranking determines everything from how much money he makes to how much he gets to eat and sleep. Rankings are determined by a wrestler's performance in the elite tournaments held six times yearly, where a wrestler fights in fifteen bouts per tournament. If he has eight victories or better, his ranking rises, but if not, his ranking falls. As a result of this, it is suspected that a wrestler with an 8-6 record, who is already guaranteed a rise in ranking, might sometimes allow one with a 7-7 record to beat him. This 8-6 wrestler may have incentive to throw the match because of a bribe, a social incentive, or some other arrangement with the other wrestler.
To prove this, experts examined the data from matches between 8-6 and 7-7 wrestlers, first when the 7-7 wrestler needs a win and later when these same two wrestlers are fighting each other again, yet without the same high stakes. While the 7-7 wrestlers won nearly 80 percent of those first, high-stakes bouts with 8-6 wrestlers, they only won 40 percent of the low-stakes rematches. This suggests that the two wrestlers made an agreement: let the 7-7 wrestler win this match, as long as the 8-6 wrestler can win the next one. Despite this evidence of rigging, though, sumo has never formally been accused of corruption, since this would cause national furor in Japan.
So with these examples in mind, just how honest or immoral are people on a daily basis? To try to answer this question, Levitt talks about an intriguing social experiment done by a man, Paul Feldman, who would drop off bagels at hundreds of different offices and see how many people actually paid the requested money on the honor system for each bagel they took. Interestingly, people were much more likely to "steal" one of his bagels in this context than they would be in a different context, such as at the counter in a bagel store. Another interesting result was that, following September 11, 2001, there was a noticeable spike in people's honesty and the overall pay rate, perhaps as a result of heightened empathy and patriotism. Small offices were also more honest than larger ones, and people paid more often in good weather than in bad weather. The worst times were the holidays, when the pay rate dropped significantly.
The overall takeaway from this bagel experiment was that far more people were honest than were not, which fits with philosopher Adam Smith's theory of the innate honesty of mankind postured in his book, The Theory of Moral Sentiments.
In Chapter 1, Levitt establishes the format he will continue to use for the duration of the book. He begins the chapter with a question–one that might seem ludicrous at first–and then proceeds to answer it using the tools of economic analysis that are the subject of Freakonomics. By the end of the chapter, this question will have been answered, and readers will be equipped with a new basis of knowledge to take with them in order to tackle the following chapter's question.
Levitt takes the concept he briefly discussed in the introduction—incentives—and does an in-depth analysis of incentives at work in a number of unconventional situations. According to him, incentives are at the core of the discipline of economics, and many economists believe that every possible behavior can be explained by incentives at work. This chapter further breaks down incentives into three different categories.
The first of these is economic incentives, which is what we most typically imagine when we think of incentives. These are things like monetary and material rewards or punishments that drive us to make certain decisions. But incentives do not stop at the tangible: moral incentives exist, showing that humans have a moral compass, whether it is innate, as famed philosopher Adam Smith argued, or simply instilled by societal norms, as some others believe. Finally, social incentives are extremely powerful. These often have to do with reputation: the thought of others judging you positively or negatively for taking a certain course of action can be an extremely powerful motivator.
We see all three of these kinds of incentives at work in the two core anecdotes Levitt presents in this chapter, regarding the cheating schoolteachers and sumo wrestlers. Schoolteachers are incentivized to cheat for economic reasons: they do not want to be fired or passed up for a promotion because of low scores. Conversely, they may be incentivized not to cheat for moral and social reasons. Sumo wrestlers with an 8-6 record may be incentivized to cheat because the 7-7 wrestler has given them a monetary bribe, because they are close friends with the 7-7 wrestler, or because they simply believe it is morally the right thing to do in order to prevent the other wrestler from dropping in the ranks. As Levitt points out, many of the most powerful incentive schemes have all three types of incentives in play.
As a concept, cheating itself is based on certain mechanisms in the economics realm. Economics postulates that in his or her pursuits, a rational person will always seek to maximize utility, or get the most possible gain from a certain course of action. By cheating, a person may be able to gain more while putting in less work, thereby maximizing the marginal utility (the effort put in subtracted from the reward gained). Thus, even rational people are incentivized to cheat, just like these schoolteachers and sumo wrestlers.
If the economy were allowed to work untouched, then it is likely that rational consumers and competitors would continue to cheat unchecked, since there is incentive to do so. However, this is where centralized agencies like governmental organizations come in. They seek to moderate the playing field and provide economic and social incentives not to cheat, as was the case with the board of Chicago Public Schools and the cheating teachers. This type of regulation works in small-scale situations like this, but it is also is at play in the larger economic world of firms, corporations, and businesses. Governmental regulation exists to make sure cheating remains at a minimum.