Steven Levitt shakes hands with Mendoza College of Business dean Martijn Cremers in the Leighton Concert Hall of the Debartolo Performing Arts Center.
Tax fraud, terrorists’ checking accounts and prostitution were just a few of the topics covered in a guest lecture Friday by award-winning economist and author Steven Levitt. The talk — entitled “Freakonomics: A Rogue Economist Explores the Hidden Side of Everything” — was part of the annual Thomas H. Quinn Lecture series.
Mendoza College of Business dean Martijn Cremers introduced Levitt, an economist and co-author of “Freakonomics.” The book spent more than eight years on the New York Times bestseller list in the U.S. and sold over 7 million copies worldwide. Currently, Levitt is a University of Chicago economics professor. Throughout the lecture, Levitt shared anecdotes from his career as a researcher.
A guest-lecturing prostitute
One such story was about what Levitt said was the one case where somebody actually took his economic advice.While conducting research on prostitution in Chicago, Levitt received an email from an escort in the area that wanted to offer data towards the study. Levitt accepted, thankful for the step forward.
“So I had the problem, I had to go to my wife and say, ‘Actually, okay, I’m going to go have lunch with a prostitute, but I swear to God, she called me and not vice versa,’” Levitt said. “I went and I met her, fascinating woman. She had a college degree. She had been a computer programmer … she used her computer programming skills to build a webpage and within a few months she was making two to three times as much, working about 15 hours a week.”
During lunch, Levitt decided to ask about pricing. Realizing her status as a local monopoly, Levitt joked and advised that — economically speaking — she should raise her price.
Later that year at the University of Chicago, Levitt decided to add a lecture on his prostitution research to an economics course he was teaching.
“So, I had this idea. Why don’t I invite my new prostitute friend to come guest lecture in my class?” Levitt said. “Economists and prostitutes have a lot in common … for the right price we’ll do anything. So I said to her, ‘What if I paid you your hourly wage?’”
At the end of the lecture, students asked questions, including a question about pricing. In response, Levitt’s friend replied that she charged $400 per hour — an increase from the previous $300 per hour price.
“I was so angry, because in our negotiations, I said I’d pay her hourly wage, which I knew would be $300 per hour. She was there for two and a half hours, so I had $750, very crisp bills. I had written a nice note. I had put them in an envelope,” Levitt said. “And now I’ve got to come up with an extra $250. I’m furious because it’s not like I can go to the National Science Foundation and say, ‘I’m too lazy to teach my own class so I hired a prostitute.’”
Levitt remembers another student raised their hand and asked how exactly she decided on a price to charge.
“And she turned to me with a big smile on her face, and she beamed at me,” Levitt said. “And she said, ‘Well, the very first time that I was with professor Levitt… he convinced me that my services were far more valuable.’”
To catch a terrorist
Levitt shared another story which he said came after people came to him, encouraging him to apply his work to catching terrorists after 9/11.Levitt determined that the best way to go about the task of crime-catching was through big data — specifically, retail banking data. After numerous failed attempts to pitch the project to banks in the United States, Levitt struck an agreement with a private bank in England.
“I convinced a British man, well more exactly, I convinced one guy at a British bank to give me the data,” Levitt said.
With his team, Levitt said he spent more than a year in trial and error mode, attempting to construct an algorithm which could identify suspected terrorists with accuracy. After a breakthrough, Levitt delivered his findings to MI5, the intelligence and security service of the United Kingdom. The final product was an algorithm that predicted suspected terrorists based on ATM withdrawal locations.
After the MI5 neglected to act on the intelligence, Levitt and his co-author Stephen Dubner decided to include the study in their second book, “SuperFreakonomics.” The subtitle of the book was, “Why suicide bombers should buy life insurance." Levitt explained that any algorithm designed to trace these terrorists would naturally exclude bank accounts in which the individual had life insurance.
During their book tour in the United Kingdom, Levitt and Dubner were scolded by the public. Levitt recalls tabloid titles such as “Freakonomics authors turned traitors.”
“People would talk about how awful it was that we would give away the secrets of catching terrorists,” Levitt said. But, there was more to the story.
“After 9/11, I had two ideas. One is maybe I could catch the terrorists with banking data, but I knew how hard a problem it was. So I had another idea. I said, ‘Somehow or another, I’ve got to get the opportunity to get the terrorists to raise their hands and say that they’re terrorists,’” Levitt said.
That, Levitt explained, was the entire idea behind the publication of the study.
“Let me ask you a question. How many of you people bought life insurance from your bank? Exactly, none,” Levitt said. “We didn’t have life insurance in our algorithm — we completely and totally lied to the world … all we really wanted to do was to wait two months and see what happened. We went back to the bank and said, ‘Hey, did anyone buy life insurance?’”
Eventually, the scheme unfolded and 13 individuals matching additional qualifications did in fact purchase life insurance from the bank.
“I can say, we probably succeeded in catching the 13 dumbest terrorists on the entire planet by virtue of that ploy,” Levitt said.
An American ‘patriot’ and the power of an idea
Levitt also shared the story of a former IRS employee named John. Although he was not seemingly special, Levitt said, John showed up on time to the same organization every day for 25 or 30 years.“John had one idea. And that doesn’t seem like that much — one idea — but if it’s a good enough idea, it is enough,” Levitt said. “He sat in the basement of some building outside of Washington, D.C. and he went over people’s tax returns. He was a tax auditor.”
Levitt explained that John’s single idea, in his estimation, saved the U.S. government $20 billion.
“It absolutely drove John crazy when people gave ridiculous names to their children,” Levitt said. “The was one that put him over the edge — he was looking at a tax return — and someone had named their daughter ‘Fluffy.’ He couldn’t take it anymore.”
According to Levitt, John wondered why the tax service didn’t ask for the social security number of the dependents.
Levitt said the effects of that single idea were unbelievable.
“And it turned out that on April 16, 1986 something really incredible happened. It turned out that overnight, in America, 7 million children had vanished. They weren’t ever seen again,” Levitt said. “Was it terrorism [or] aliens? No, it was John because it turned out … that 7 million children were created, manufactured, made up by the parents in order to get what, at that time, was a $250 deduction.”
For Levitt, the two takeaways of this story are: the power of incentives and the even greater power of an idea.
“Anyone could see that if you don’t ask for the social security number, you don’t have a way of teaching people to not cheat. But, the thing is, nobody did it,” Levitt said. “Those are the ideas that I love. Those that are so obvious everyone should see them, but for some reason, no one can except for that one guy.”
Studying the unstudied
Discussing his career path, Levitt recalled listening to his father, a medical researcher, tell a story behind his own studies.“This guy, Dr. Engelton, sat my dad down in his office and he said, ‘Levitt, I’m sorry to say this, but you have no talent for medical research.’ That was obviously horrifying,” Levitt said. “But the guy continued, ‘There is one area of medicine that is so devoid of knowledge that even someone with severe limitations might be able to make a contribution … intestinal gas.”
Levitt’s father went on to become the world’s foremost expert on intestinal gas. Levitt explained that GQ Magazine once referred to his father as “The King of Farts.”
“So, my dad said, ‘I have to tell you, since I have no talent, you have no talent. If you ever want to succeed in a profession for which you have no talent, the only hope you have is to take on a set of topics that are so embarrassing to the degree that no one with self-respect would work on. It worked for me, maybe it can work for you,’” Levitt said.
Levitt did just that. He studied crime, cheating, sumo wrestling, real estate — anything that sparked his interest. He soon discovered that these types of topics were not just exciting to study. It turned out they also excited the millions of people that read his books, “Freakonomics” and “SuperFreakonomics.”
