Question two:

            In the book Freakonomics, Levit explores the idea of information abuse and information asymmetry. Information abuse is the idea that some people use information that people don’t know to their advantage. And information asymmetry is the idea of others having advanced knowledge in a field and using it to their advantage. They are pretty similar. Levit will discuss the ideas in chapter two and then further relate them in chapter three. Prime examples of the abuse and asymmetry can be seen in chapter two with the KKK, and the real-estate agent, and then these ideas are brought to a new level in chapter three in the crack dealing gangs, and it can even be seen in real life.

            The idea of hoarding information and abusing information is very prevalent in the KKK. The KKK, of course, was an organization that used tactics of fear to get what they wanted. In the early days they would lynch quite a few black people. On page 56, a chart depicts the number of people lynched the KKK did per decade. From 1890-1899, the numbers are quite high. 1,111 people were killed by the KKK. However, as the gang’s influence grew throughout time the number of people lynched went down, to the point where in the 1960s only 3 people were lynched. This time period was when the KKK was in its prime, so the question is why were the numbers so low, yet the gang’s influence so large? Levit explains the phenomenon on page 57, “The most compelling explanation is that all those early lynchings worked…had through their actions and their rhetoric developed a strong incentive scheme that was terribly clear and terribly frightening. If a black person violated the accepted code of behavior…he knew he might well be punished, perhaps by death.” So what we have here is an example of information abuse. The KKK, while they were known for killing people, didn’t actually kill that many people in the later years of the Klan. However, black people didn’t know that, nobody except the Klan leaders knew just how few people they actually killed, and only the Klan leaders knew that they didn’t want to kill. The leaders flat out said that they didn’t want to kill; they didn’t even want to use that much violence. The thing is that only they knew that. Black thought that if they violated any of the Klan’s social code then they would be lynched. The abuse and asymmetry of information caused a whole race of people to voluntarily act like second class citizens just out of fear. Had they had the information the Klan had the civil rights movement may have began much earlier. Regardless, we can see how information hoarding can lead to nation wide fear and irrational action.

            Information hoarding can also happen on a very small level, it’s not always done by large organizations. It happens all the time in real-estate. Real-estate agents are experts in the field of real-estate; the person selling his or her house is not. We look to real-estate agents because we think they will get us a good deal, and make us money. However, that’s not exactly how the agents see it. They, of course, want to make money too, but they also don’t want to spend too much time on your house when they can move on to other houses, and in doing this make more money. Levit shows proof of this on page 69, “the problem is that the agent only stands to personally gain and additional $150 by selling your house for $10,000 more, which isn’t that much more of a reward for a lot of extra work. So her job is to convince you that a $300,000 offer is in fact a very good offer, even a generous one, and that only a fool would refuse it.” So the idea that Levit brings up here is an example of information asymmetry, in that you don’t know what the real-estate agent knows, so you trust her, even though she knows that you could make a lot more money if you held out a little longer. This imbalance of information causes the real-estate agent to make a lot of money by being able to move on to a different house and make another commission sooner, and for you to lose a lot of money by being fooled into selling your house preemptively. So this whole idea of information abuse and information asymmetry is very powerful. It’s good for those who have information and bad for those who don’t.

            Levit expands the idea of information abuse even further in the next chapter. In crack gangs, like the one discussed with J.T. in Chicago, there is a leader and his “foot soldiers” that do the actual work. In this case the leader is J.T., and the work is selling crack and defending against rival gangs. J.T., being the leader, has access to all of the information of the gang, including salaries. He keeps records on transactions and how much everyone in the gang earns. He makes $8,500 a month, or about $66 an hour. A foot soldier, on the other hand, makes a mere $3.30 an hour. So why is it that crack dealers, who risk their lives everyday selling crack make such miniscule amounts, compared to J.T. who makes so much more money do doing less dangerous work? Levit explains why this happens on page 103, “The problem with crack dealing is the same as in every other glamour profession: a lot of people are competing for very few prizes. Earning big money in the crack gang wasn’t much more likely than the Wisconsin farm girl becoming a movie star…but criminals, like everyone else respond to incentives, and if the prize is big enough, they will form a line a block long just hoping for a chance.” Levit brings up the idea of information abuse. He knows that people will get killed trying to get his job. He knows that after four years there is a 25% chance of getting being in the crack business, but he also knows that people will line up for the job of being a crack dealer, so he can pay them minuscule amounts, and the supply of crack dealers won’t go down. J.T. is abusing information to get people to work for him, and he exploits them to make huge profits for himself. Once again Levit shows how information asymmetry is good for the experts, but bad for the commoner.

            We can also see this idea of information hoarding in real life. We can see it in Wall Street. The commoner does not know much about investing, but he will still try his hand at the stock market anyway, but to take off some of the stress he hires someone to help him make his investments. The consultant will probably make some sort of commission off of every transaction, so he will encourage the investor to buy and sell often, even if he knows that it’s not the best deal. The consultant will be making a lot of money of commission and transaction fees, while the investor will make less money. Again we can see another example that experts will use information to make money, while the common person suffers from a lack of information.

            Levit goes very in depth with the idea of information hoarding. He talks a lot about how everyone who has information can use it to their advantage. Wheatear it be the KKK, real-estate agents, crack dealers, or financial consultants, everyone uses information to take advantage of other people. Everyone has different incentives, but the common theme is influence or power, and experts win, while those without the information lose.