Thursday, May 5, 2011

Freakonomics: Chapter 2 - How is the Ku Klux Klan like a group of Real Estate Agents?

1. Describe, in broad terms, how the Ku Klux Klan came into existence and how its level of popularity varied over time. In addition, identify specific factors that caused the Klan’s popularity to rise or fall.

The Ku Klux Klan started out as just a circle of friend with like-minded views. Through the WWI and WWII the group was low but after the KKK grew and started causing more volience. However, it was the acts of Stetson Kennedy that caused the major drop in Klan members.

2. Explain Stetson Kennedy’s role in the Klan’s ultimate decline in popularity in the South, focusing on the role the dissemination of what the Klan believed was secret information played in that process.

Kennedy hated the Klan and what they stood for. In studying the KKK he realized that no one really knew what the Klan was doing behind closed doors. So, to find out, he joined. After meetings, he would go home and write the passwords, events, and rankings of KKK members and give them out to union members, anti-KKK politicans, etc. However, the Klan remained strong. The ultimate downfall of the KKK was when Kennedy gave all the infomation he had to the Superman radio show which monked the KKK and all that it stood for. Within two Klan meetings no one was showing up.

3. Explain what is meant by the term “information asymmetries” and give examples of information asymmetries we encounter in everyday life. 

Infomation asymmetries are infomation that is not told (and may not even exist) but changed a person's decision. For example, if someone is selling a new car many people will assume that there is something wrong with it. This way not be the case, but nevertheless it becomes almost impossible for the seller to sell the car for its worth.

4. Explain whether, and if so, how, information asymmetries create a competitive advantage for particular individuals.

Using the lemon car example again it is possible that infomation asymmetries can be used as an advantage. If someone's car really was a lemon that infomation may never be disclosed and the buyer of the car will be cheated out of it's money.

5. Explain how such innovations as the Internet have affected the prevalence of information asymmetries.

The internet is home to a unlimited amount of infomation. Most of this infomation is bogus and untrue because anyone anywhere can write anything whether is it true or not. You can find multiple opinions and theories and any subject but finding facts is almost impossible.

6. Explain how information asymmetries facilitated the corporate scandals that occurred in the early 2000s.

Multiple big name businesses were conducting many "under the table" deals which came to light. Some of these including trading infomation about shares (which caused the scandal with Martha Stewart,) hidden memberships, disguised debt, and manipulation, These were all things that were happening but just weren't talked about (information asymmetries.)

7. Provide examples that illustrate how the combination of an information asymmetry and fear can lead to inefficient outcomes. Explain how the introduction of the element of fear makes the problem of the information asymmetry even worse.

Doctors can use their knowledge as an information asymmetry. They may know that you don't need a certain surgery but will use fear (like the fear of having heart attack) to "sell" you on the idea. You need this surgery to survive when really, you don't. This causes more money to be spent on unnecessary medical procedures and more money to pad the pocket of the doctor that sold it to you.

8. What evidence do the authors offer to support their claim that real estate agents exploit an information asymmetry to their client’s detriment? As more clients become aware of the possibility of such behavior by agents, how might it affect the relationship between the two?

A person trying to sell their house has two main fears: will I try and sell my house for least or far more then it is worth. So the logal solution is to hire a real estate agent an expert at selling homes. However, the real estate agent also uses that to her advantage by setting and selling the price that gives her the most profit. The internet however gets rid of this problem. Anyone can go online and do their own research on any home they want without realtors help.

9. Explain how the choice of terms a real estate agent uses to describe a particular property conveys additional information about the property, and hence the price a potential buyer might be able to successfully offer the seller.

If an ad for a home uses general terms such as "fantastic" "spacious" or "great neighborhood" it is really covering up the fact that the house is not interesting and not worth buying. More descriptive words like "maple" "hardwood floors" and "state of the art" give you an idea of what is in the home and which makes it more appealing.

10. This chapter examines how the economic incentives of a real estate agent may differ from those of his or her client.What other subject matter experts are often hired by individuals and businesses? Might they have incentives that differ from those of the clients that hire them?

Funeral directors are hired to give griefing familes final resting places for their loved ones. However, instead of showing the reasonably priced caskets they will show you the top of the line, very expensive caskets because it is good for business.

11. Explain how the information a person has can affect his/her propensity to discriminate. As part of your explanation, distinguish between taste-based discrimination and information-based discrimination.

taste-based discrimination - when someone just doesn't want to assoicate with a certain type of people
information-based discrimination - when someone feels that a certain type of person is not capable of doing something

12. According to the voting data from the Weakest Link, which two groups of people are most likely to be discriminated against in that setting.What type of discrimination is being practiced in each case? Explain.

Elderly - taste-based - Regardless of their skill for the game elderly players were voted off on the fact that they don't want them around
Hispanics - information-based - Regardless of their skill for the game hispanic players were voted of on the opinion they are poor players

13. What do the data say about the characteristics of men and women who participate in Internet dating sites relative to the characteristics of the broader population?

Men and women on interest dating sites can do one of two things: 1. Try and be and truthful as possible to find someone they like or 2. Lie to seem more appealing. This can be very true of the broader popualtion as well.

14. Assuming many of the people who use Internet dating sites are not being truthful when they describe themselves, what could motivate them to do so?

One thing could be knowing that if they ever actually met a date face-to-face, the truth would likely come out.


  1. they are like spies for me keeping me constantly aware of new questions and new math problems that appear on the Florida real estate exam.