Monday, May 30, 2011

Freaknomics - a waste of time.

The freakonomics people have created quite a franchise from one book.  But is the information in that book really relevant or accurate?  I am less and less inclined to think so.

As I noted in my previous discussion about Gurus, one way to market yourself as a Guru is to do what all the good Gurus do, and that is sell unorthodox advice.  No one will pay you a plug nickel for a diet book that is just all blank pages with the words "Eat Less!" on them.  But that is the common sense (and only good advice) that dieters really need.  There is no "trick to the tiny belly!" other than to eat less and exercise more.

Similarly, in financial matters, the only sound advice is to spend less and save more.  Anything else is just stupid trickery that doesn't accomplish much, if it fact, it doesn't set you behind (e.g., "Pay off your smallest debts first" - which makes no sense unless they are also your highest interest rate debts).

The freakonomics people are in the same genre.  They tell stories in their book and their movie, and their website that try to get you to scratch your head and say, "Gee... I never thought of it THAT way before!"

I read their book a long time ago, and sort of thought, "puh, why is everyone making a big deal about this book?" and promptly forgot about it.  A catchy title, and catchy cover graphics - the sort of thing that used to sell at Borders.  But like the book "Liberal Fascism," beyond the catchy title and cover graphics, there was no "there" there to back it up.

In reality, most of their data is of the "Well, duh!" variety, or it comes to inaccurate conclusions based on correlation, or they confuse correlation with causation (while trying to maintain that other people do just that!) and as a side dish, throw in a little racism, to boot.  Let me explain.

1.  Real Estate Agents

For example, one of their startling discoveries is that Real Estate Agents really don't care about getting the maximum price for your home.  On a 6% commission, an additional $10,000 in sales price means little to them personally (particularly if they are splitting the commission and after they pay their broker).  They make more money selling more houses than maximizing the profit from one sale.  So they are better off selling two houses a month for slightly below market value than selling one house above market value.

I am not sure this qualifies as a "startling revelation" to anyone - particularly if they can do basic math and understand how percentages work.  But again, as they told us in Peggy Sue Got Married, "you don't need to know math in real life!" and many people believe this and think fractions are "hard" and thus don't understand how the Real Estate Agent's commission scheme works.

But in addition to not being much of a revelation to anyone past the 4th grade level, it also is somewhat wrong.  Yes, Real Estate Agents want to move houses - that is their job.  And yes, they might push a low-ball offer to get a house sold and get a commission.  But oftentimes such offers may be in the owner's best interests.

As "proof" of the double-dealing that Real Estate Agents do, the author's point to a study which shows that an Agent's own house stays on the market longer and often goes for a higher price.  Confusing correlation with causation, the authors then point to this as "proof" that the agents are pushing sellers to take low-ball offers.

But they fail to take into account that many Agents put their homes on the market at high prices, just to see if they can sell them.  They are not moving to another town (as you may be) but are testing the market.  And since they understand how to make a house show properly, they can polish up their home, put a premium price on it and wait for the "right buyer to come along".  If it sells, great.  If not, well, they ain't moving anyway.

But you, the homeowner, is often under pressure to sell, due to job relocation or because you already have an offer on another home.  So you can't afford to wait around and see if you can get more money for your home.  And likely, too, you ignored your agent's advice and left all your personal possessions and junk in your home (see my postings on how to market your house) so it shows poorly and thus commands a lower price.  You are not a Real Estate professional, and maybe sell or buy a house 2-3 times in your lifetime.  So naturally, you are not as good at it.

And since you likely have to sell, the Agent is not going to discourage you from taking a "reasonable" offer close to your asking price.  Why?  Because the old adage is true:  The first offer is often the best offer.  When a house sits on the market for a long period of time, people suspect that something is wrong with it, or by now you are desperate - so they low-ball you.

And I have seen firsthand, homeowners who get greedy and say "I'll hold out for another $10,000" and wait months and months, only to take an offer LESS than the first one, and that after paying $10,000 in mortgage payments in the interim.  Does the homeowner really come out ahead?  No.

But then again, I made a lot of money in Real Estate, and I have a lot of friends in the business - Agents, Brokers, Mortgage Brokers, closing attorneys, appraisers, etc., and I have seen these scenarios play out in person.  The raw data collected by the authors of freakonomics is correlation, not causation.  And the authors, who stress throughout the book that "everyone else" confuses correlation with causation, step right into that smoking pile of dogshit.

If you are selling your house, and you get a good offer that is reasonable, take it - or at least counteroffer.  The author's advice to "hold out" for more money and keep the house on the market longer and longer may have some theoretical value, but in the real world, often doesn't work out.

For example, I could have gotten more money for our vacation home if I sold it today (in May), as opposed to November.  But I would have paid $16,000 more in Agent fees and another $30,000 in mortgage payments, utilities, insurance, repairs, and taxes in the interim.  So taking a "lowball" offer of $45,000 less actually was a sound move.  Screw freakonomics - they have no clue what they are talking about.

2. Parenting

In the next section of their book and movie, they talk about parenting.  Their conclusion is that the socio-economic class you are from is more determinative of the success or failure of your children than anything. So if you buy a lot of parenting books, your kid won't come out better.  That is predetermined by the fact that you are rich enough to buy a lot of parenting books and are inclined to do so.

While there is some truth to this, it tends to over-simplify and again, takes correlation (success rate of children and income level of parents) and turns it into causation - the very thing the authors decry.

Rich parents who abuse and neglect their kids are likely to have unsuccessful or underachieving children (and I can point to some pretty wealthy families in places where I grew up as proof of this, including my own).  On the other hand, a poor family that values education and encourages their children to get ahead will end up with successful children.  Actual actions are more relevant and powerful that meaningless statistics.  Your outcome and future is not predetermined by your starting income level - although that is a factor and undeniably helps.

Your parents may be rich - if they work in organized crime.  That doesn't mean you will not end up in jail.  And in fact, you may be more likely to end up in jail as a result, if you follow the family business.

But all of that is lost on the authors.  No, no, money is the whole deal.  If you come from wealth, you will be wealthy.  If you come from poverty, you will be poor.  And this sort of statistical manipulation does fit a left-wing "let's redistribute the wealth" agenda.  After all, if your success in this country is determined solely by income, then all incomes should be made equal, right?

3.  Racism and Baby Names

One of the most odious parts of the book is where they engage in the dirty little secret game that most white people engage in, once the blacks have left the room, of making fun of black names.  If you are black, you probably suspected that white folks poke fun at your culture, clothing, and names, whenever you are not around.  And maybe black people do the same about whites - I have no data on that.

But white folks do it - they ALL do it, even the so-called "Liberal" whites.   Liberals, of course, cloak their participation in the game as well-meaning concern for blacks - because they may be limiting their child's opportunities later in life based on oddball-sounding names like "La Zanya" (no kidding, an actual name).

OK, perhaps it is harmless sport, or closeted racism.  But the freakonomics people bring it out of the closet by pretending that it is a scientific study.  Now we can make fun of black people's names and pretend it is scientific, not just racist!

But again, their logic and reasoning falls down here.  First, they claim that names make no difference in the overall success rate of a child.  We are given stories about a man who names his kids Winner and Loser.  Loser goes on to become successful, while Winner ends up in jail.  Baby names make no difference, we are told.

Then they go on to say that actual names are not indicative of success or failure of a person, but once again, it is socio-economic class and income.  So a "black baby name" doesn't cause disadvantage, but rather the fact that the person bestowing the name tends statistically to be from a lower socio-economic class.

OK, so a few chuckles at funny made-up black names, and then the conclusion that it makes no difference what you name your kid - socio-economic class dictates all (this is apparently the secret side behind everything that they tout in their blubs).

But then they go on with a study where they sent out resumes on to thousands of employers.  On half they put white-sounding names and on half they put black-sounding names.  And guess who gets the interview call-back?  Not hard to figure out.  Yes, Virginia, racism exists.

So, it makes no difference what you name your kid, the author say, because socio-economic class dictates all.  Unless you give your kid a black name, because then racism kicks in.  Which is it?  Names matter or they don't?

My conclusion is that they have no conclusion.  The chapter on baby names is just a chance for white folks to legitimize their practice of making fun of black names.  And please, don't try to tell me you don't do it, because even the most liberal person does it (they seem to do it the most!).

Perhaps to avoid charges of racism, they throw in the second-most popular sport amongst affluent liberal urban whites - making fun of white-trash names.  Brandy, Crystal, Tiffany - all the names you hear in the trailer park or at the strip club.  Ha-ha, isn't that funny.  But it's not just social snobbery.  No, this is all in the name of science and economics, although once again, they sort of fail to come to any sort of conclusion that isn't based on correlation, not causation.

* * * 

So what is the point of freakonomics?  Well, it has been good economics for the "Rogue Economist" authors, who have a book, a movie, a website, and many guest appearances on talk shows to their name.  The money is rolling in, and freakonomics proves, yet once again, that you can make a boatload of money selling "unconventional advice" to people - stuff that gets then scratching their heads and saying "Gee... I never thought of it THAT way, before!"

But in terms of practical advice for individuals or even institutions, it leaves a lot lacking.  Should you take the first offer on your house, or hold out for more money?  Likely, you will take the first offer, and the Agent is probably advising you that because they've seen what happens when there is no second offer and the seller gets mad.  Should you name your kid "La Zanya"?  Probably not.  Kids have a hard enough time these days and as adults don't need to be profiled.

Is your destiny determined by the socio-economic class you come from?  I think not - although it is a powerful influence.  Over the years, I have worked for a number of men (and women) who overcame their socio-economic backgrounds to become wildly successful and wealthy men and women.  Their parent's income, it turns out, was not determinative of their success later in life.

It turns out that we all have a measure of free will in this world.  It turns out that your personal choices in life are far more powerful than statistics and surveys.  Correlation is not Causation, as the authors note time and time again (while blithely ignoring it).  And your life is more than a set of statistical correlations.

Freakonomics sucks.  There is no "there" there.