Freakonomics
Freakonomics is all about incentives. And if you think incentives are unimportant, you are making a big mistake. The billionaire Charlie Munger, who is considered the smartest man alive by Bill Gates and Warren Buffet, knows the value of incentives and says how every year, that he underestimated the power of incentives. In this book, two economists, Steve Lewitt and Stephen Dubner give an interesting take on incentive, so without further ado, let’s discuss a few key takeaways from this book.
First off, incentives are part of our instinct and everyone responds to incentives. In fact, if you remember from biology, every living creature responds to their surrounding. If you are trying to achieve something, but can’t seem to reach your goals. Ask yourself, “What’s my incentive to do this?” Chances are you don’t have a clear incentive if you are unable to reach your goals as you don't feel motivated enough. However, a clear incentive does not mean losing 50 pounds in a day, or making a million dollars over night. Setting goals that are not reachable defeats the purpose as our brain realizes that it will never happen and our willpower starts to decrease. If unrealistic goals are often set, it rewires our brain to think that none of our goals can be reached which creates a negative cycle. So what is an ideal incentive?
An ideal incentive should be something you can reach. For example, instead losing 50 pounds in a week, your goal can be to walk 15 minutes on the treadmill twice a day. This creates a habit and as you start to have momentum in what you do, you can start to expand from there. And as you start to reach goals and see results, it releases dopamine from our brain as our goals are being reached. Now, that doesn’t mean you shouldn’t have big goals. Everyone should have a vision about their life in 10 years. However, there should be micro-goals that incentivize and keep us on our goal. So let’s take a few examples at a few incentives.
So, if we take a look at the top sales people, they make commission for every sale that they close. They are able to see the money that they have made on their account and hence are motivated to close more sales. This is using money as an incentive to drive the sales man to close even more sales.
Who is motivated by money? Well just about anyone. Anyone at a job will work harder if there is a clear incentive for them to work harder.
Let’s take a look at the second incentive. When people in Hollywood are trying to become actors, many aren’t trying to become actors for money. What are these people motivated by? They are motivated by status and fame. People that are motivated by status want to be in control of what they do and don’t like to be told what to do by other people. People motivated by status tend to like things such as being well-known or having a high-position at a company.
Finally, let’s take a look at the last incentive: love. The incentive for love is considered as the most powerful one by many scientists and psychologists. For example, night clubs in Las Vegas are making so much money because people are able to meet beautiful people at the club. Online dating websites are worth more than a billion dollars because they were able to incentivize users to think that they can meet their ideal love if they use their dating website. People like Donald Trump acknowledges the power of incentive and he has once said that he is motivated to make money to marry people like Miss Universe.
Let’s now look at some situations where incentives aren’t working the way it should:
For a real estate agent, her incentive is to make the most money by selling houses, and her commissions are based on the price. You might be asking her incentives are aligned with the sale price. However, if we actually examine the incentives, it seems very tricky. The agent typically gets about 1.5% of the total purchase price. If an agent can get $300,000 dollars for a house, her commissions are going to be about $4500. If she can sell the house for $310,000 more by putting ads and doing more work, she should be incentivized to charge a higher price for the house. But taking a closer look at incentives, the agent only gets 150 dollars even if she puts in extra work. Hence, the real estate agent is motivated to make the deal fast rather than sell the house for the best price.
Now, let’s talk about jobs. A teacher in United States that educates kids and teaches kids what to do in their future make approximately $45000. On the other hand, a NBA player that shoots balls through a hoop makes approximately $5million. This may seem unfair to many people as a NBA player that isn’t making a profound impact is making 100 times a teacher that is delivering education to kids. Why is this happening?
In order for people to make a lot of money, you have to be good at some skill. And in order to make a lot of money, that skill has to pass two tests. It has to be rare and in-demand. Why don’t teachers make a lot of money? Although teachers are in-demand, teachers aren’t rare. Why do NBA players make a lot of money? Because many people want to watch professional basketball players play and there aren’t many people that are 6′ 6″ that are amazing at basketball. Since NBA players are in-demand and rare, they are rewarded greatly for their work. Something like under water frisbee players are very rare. However, they aren’t in demand, therefore they don’t make enough money. Ask yourself this question if you want to make a lot of money, “Is what I am good at in-demand and rare?”
Now do incentives work on everyone? People like criminals and experts don’t seem like they will respond to incentives. There’s a great quote from this book that explains this, “But experts are human, and humans respond to incentives. How any given expert treats you, therefore, will depend on how that expert’s incentives are set up. Sometimes his incentives may work in your favor...In a medical study, it turned out that obstetricians in areas with declining birth rates are much more likely to perform cesarean-section deliveries.” This is one of the quotes from this book. It explains incentives very accurately, no matter who they are. Criminals and drug dealers also respond to incentives. A study shows that if economic growth of U.S., became better, the number of drug dealers decreased. Why? If drug dealers were able to make more money working at Walmart because of economic growth, they quit being a drug dealer. This shows no matter what position or personality, people respond to incentives.
This book is a great book that discusses about incentives. If you really want to achieve great things in life, we need to incentivize people in the correct way, and this is a book I have read over 5 times as I understand more about incentives as I read it. This book is a must-read and I recommend you to actually read through this book. So until the next review, stay strong and keep reading! :)
P.S. For updates on which books I'm reading, be sure to follow me on Instagram!
Freakonomics is all about incentives. And if you think incentives are unimportant, you are making a big mistake. The billionaire Charlie Munger, who is considered the smartest man alive by Bill Gates and Warren Buffet, knows the value of incentives and says how every year, that he underestimated the power of incentives. In this book, two economists, Steve Lewitt and Stephen Dubner give an interesting take on incentive, so without further ado, let’s discuss a few key takeaways from this book.
First off, incentives are part of our instinct and everyone responds to incentives. In fact, if you remember from biology, every living creature responds to their surrounding. If you are trying to achieve something, but can’t seem to reach your goals. Ask yourself, “What’s my incentive to do this?” Chances are you don’t have a clear incentive if you are unable to reach your goals as you don't feel motivated enough. However, a clear incentive does not mean losing 50 pounds in a day, or making a million dollars over night. Setting goals that are not reachable defeats the purpose as our brain realizes that it will never happen and our willpower starts to decrease. If unrealistic goals are often set, it rewires our brain to think that none of our goals can be reached which creates a negative cycle. So what is an ideal incentive?
An ideal incentive should be something you can reach. For example, instead losing 50 pounds in a week, your goal can be to walk 15 minutes on the treadmill twice a day. This creates a habit and as you start to have momentum in what you do, you can start to expand from there. And as you start to reach goals and see results, it releases dopamine from our brain as our goals are being reached. Now, that doesn’t mean you shouldn’t have big goals. Everyone should have a vision about their life in 10 years. However, there should be micro-goals that incentivize and keep us on our goal. So let’s take a few examples at a few incentives.
So, if we take a look at the top sales people, they make commission for every sale that they close. They are able to see the money that they have made on their account and hence are motivated to close more sales. This is using money as an incentive to drive the sales man to close even more sales.
Who is motivated by money? Well just about anyone. Anyone at a job will work harder if there is a clear incentive for them to work harder.
Let’s take a look at the second incentive. When people in Hollywood are trying to become actors, many aren’t trying to become actors for money. What are these people motivated by? They are motivated by status and fame. People that are motivated by status want to be in control of what they do and don’t like to be told what to do by other people. People motivated by status tend to like things such as being well-known or having a high-position at a company.
Finally, let’s take a look at the last incentive: love. The incentive for love is considered as the most powerful one by many scientists and psychologists. For example, night clubs in Las Vegas are making so much money because people are able to meet beautiful people at the club. Online dating websites are worth more than a billion dollars because they were able to incentivize users to think that they can meet their ideal love if they use their dating website. People like Donald Trump acknowledges the power of incentive and he has once said that he is motivated to make money to marry people like Miss Universe.
Let’s now look at some situations where incentives aren’t working the way it should:
For a real estate agent, her incentive is to make the most money by selling houses, and her commissions are based on the price. You might be asking her incentives are aligned with the sale price. However, if we actually examine the incentives, it seems very tricky. The agent typically gets about 1.5% of the total purchase price. If an agent can get $300,000 dollars for a house, her commissions are going to be about $4500. If she can sell the house for $310,000 more by putting ads and doing more work, she should be incentivized to charge a higher price for the house. But taking a closer look at incentives, the agent only gets 150 dollars even if she puts in extra work. Hence, the real estate agent is motivated to make the deal fast rather than sell the house for the best price.
Now, let’s talk about jobs. A teacher in United States that educates kids and teaches kids what to do in their future make approximately $45000. On the other hand, a NBA player that shoots balls through a hoop makes approximately $5million. This may seem unfair to many people as a NBA player that isn’t making a profound impact is making 100 times a teacher that is delivering education to kids. Why is this happening?
In order for people to make a lot of money, you have to be good at some skill. And in order to make a lot of money, that skill has to pass two tests. It has to be rare and in-demand. Why don’t teachers make a lot of money? Although teachers are in-demand, teachers aren’t rare. Why do NBA players make a lot of money? Because many people want to watch professional basketball players play and there aren’t many people that are 6′ 6″ that are amazing at basketball. Since NBA players are in-demand and rare, they are rewarded greatly for their work. Something like under water frisbee players are very rare. However, they aren’t in demand, therefore they don’t make enough money. Ask yourself this question if you want to make a lot of money, “Is what I am good at in-demand and rare?”
Now do incentives work on everyone? People like criminals and experts don’t seem like they will respond to incentives. There’s a great quote from this book that explains this, “But experts are human, and humans respond to incentives. How any given expert treats you, therefore, will depend on how that expert’s incentives are set up. Sometimes his incentives may work in your favor...In a medical study, it turned out that obstetricians in areas with declining birth rates are much more likely to perform cesarean-section deliveries.” This is one of the quotes from this book. It explains incentives very accurately, no matter who they are. Criminals and drug dealers also respond to incentives. A study shows that if economic growth of U.S., became better, the number of drug dealers decreased. Why? If drug dealers were able to make more money working at Walmart because of economic growth, they quit being a drug dealer. This shows no matter what position or personality, people respond to incentives.
This book is a great book that discusses about incentives. If you really want to achieve great things in life, we need to incentivize people in the correct way, and this is a book I have read over 5 times as I understand more about incentives as I read it. This book is a must-read and I recommend you to actually read through this book. So until the next review, stay strong and keep reading! :)
P.S. For updates on which books I'm reading, be sure to follow me on Instagram!
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