I just finished reading Freakonomics and I’ve never been as disgusted with a “nonfiction” book as I am right now. It seems to violate every fundamental principle of any organized school of rational thought – and yet somehow it’s a best seller.
At every single turn throughout the book, Levitt and Dubner attempt to apply seemingly unrelated explanations to natural phenomena under the premise of “a different approach to economics.” Yet even trivial internet investigation can indicate that in fact there are much more direct explanations for every major point discussed in the book. Sadly, this is just an attempt to turn the authors’ academic papers (which are of questionable repute but a very controversial nature) into mass market popularity, without actually standing for real fundamental principles.
Take the most “controversial” premise in the book, the portion that tries to tie the 1973 legalization of abortion to the drop in crime in the 1990s. The general claim here is that crime was cleaned up due to fewer undesirables on the streets. In fact, if you look at a curve of crack cocaine usage in the United States over the last fifty years or so, it almost directly matches the levels of crime in the United States, with usage rising wildly through the 1970s and 1980s and falling in the 1990s. And this directly matches the increase in sophistication of drug cartels in the 1970s and 1980s and the increase in sophistication in the war on drugs in the 1990s. What about the “sudden” change in the legalization of abortion? Please. Many doctors were performing abortions illegally prior to 1973, and many doctors didn’t suddenly begin doing them after Roe. Also, the sophistication of the South American drug cartels in the 1970s had no connection to judgements on abortion in the United States (outside of chaos theory). So, using 1973 as a strong demarcation is foolish.
In an issue closer to personal finance, another faulty argument from Freakonomics is the implication that Chicago real estate agents bilk their clients because the homes of the real estate agent sell at a higher average price than those of their clients. What wasn’t considered, and is utterly vital to the picture, is the mentality of the two sellers: the “client” home seller is often under the gun to sell due to a move or a major change in their situation, whereas many sales from real estate agents are due to a desire to “upgrade.” This means that a real estate agent can allow their house to wait around for the right buyer before selling, whereas an average client often cannot afford to wait. This common sense answer was ignored by Levitt and Dubner so that they could make a “shocking” but bogus conclusion.
What does this all have to do with personal finance, you’re probably asking. The problems with Freakonomics are the same problems that exist with financial gurus and charlatans: they prescribe solutions that are far too complex (and usually flawed), when much simpler and direct solutions exist for almost every problem. If you want passive income, for example, don’t follow a get rich quick scheme – save and invest your money and it will happen.