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After going dry for 86 seasons, the Boston Red Sox have won two
World Series in the past four years. This hot stretch began soon
after the team hired Bill James, the sports most accomplished
statistician, as a senior baseball operations adviser. Whether
coincidence or not, this overlap was widely noted, and it is now
standard practice for baseball teams to hire a flock of statheads and
use their analyses to help make decisions on and off the field.
This probably makes good sense for a sport like baseball, which is
full of discrete events that are easily measured. It is also
understandable, however, that there is less of an edge to be gained
from statistical analysis now that everyone is doing it.
Basketball, meanwhile, might seem too hectic and woolly for such
rigorous dissection. It is far more collaborative than baseball and
happens much faster, with players shifting from offense one
moment to defense the next. (Hockey and football present their
own challenges.) A lot of things happen on a basketball court
picks, passes, defensive shifts that arent routinely quantified.
This is not to suggest that basketball teams dont think statistically.
But only recently have a few teams begun to hire a new breed of
stathead to scrutinize every conceivable variable.
The Boston Celtics, owned by several men with venture-capital

backgrounds, have for the past few years been one of the most data-
driven teams in the N.B.A. They have also just completed the
biggest single-season turnaround in history, entering the playoffs
two weeks ago with a league-best 66 victories after winning just 24
games last year.
Continue reading the main story

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Coincidence? Probably, for the Celtics obtained two monstrously
accomplished players in the off-season, Kevin Garnett and Ray
Allen. It didnt take a statistician to tell you that the Celtics would
be a lot better this year than last.
But the team also employs what the general manager, Danny Ainge,
calls his secret weapon, a 32-year-old named Mike Zarren, who
seems to know every data point about every N.B.A. player, past and
present. Garnett calls him Numbers, the Celtics Dancers call him
Stats and Paul Pierce, the teams longtime standout, calls him
M.I.T. even though Zarren never went there. He did, however, lead
a University of Chicago quiz-bowl team to four national tournament
victories and later graduated from Harvard Law. (Disclosure:
Steven Levitt taught Zarren while the latter was an economics
undergrad at Chicago.) He subsequently fell from the lofty realm of
academia into his dream job, as the Celtics stat savant.
Zarren also happens to be the teams associate counsel, although

this would be hard to believe if you came across him at a game, way
up in the cheap seats, wearing his green satin Celtics jacket and
shouting himself hoarse: He pushed! He pushed! . . . You got em,
K.G.! To describe his Celtics fandom as rabid would be a gross
understatement. This is his third season on the Celtics payroll he
worked two years without pay as a law student and while clerking
for a judge but his family has had season tickets since 1974. He
began regularly attending games at age 5, and since moving back to
Boston after college, he has missed only five home games.
Photo
CreditIllustration by Paul Sahre

Three of those, he says, were due to illness.
Danny Ainge was a key player on the last Celtics team to win an
N.B.A. title, more than 20 years ago. He also played Major League
Baseball for three summers, with the Toronto Blue Jays. You might
think that is why he embraces the statistical approach to sport now
commonly called moneyball, after the title of Michael Lewiss
book, but in fact Ainge is not a true believer. I just think theres a
lot of to-do about nothing in some of that, he says. I mean, I heard
about on-base percentage in 1976 when I was a junior in high
school.
Ainge hired Zarren simply because he wants any advantage worth

having, and Zarrens insights are more information on every
decision we make, Ainge says. Mike is a much smarter guy than I
am. Im open to smarter people than me. It still comes down to my
instincts. I have to make the choice, no matter what my scouts say,
no matter what the models say. I dont think its realistic to think
that a statistical model will ever be foolproof in basketball because
there are so many variables, but I do think it can help us.
There are two channels through which Zarren can help the Celtics.
The first is by assessing potential deals and draft picks, which
means bouncing information off of Ainge. The second channel is
strategic advice, which means going to Coach Doc Rivers, whom
Ainge says is skeptically receptive to Zarrens insights. You sense
that Zarren has gained credibility within the Celtics not because the
basketball people adore his regression analyses but because he
adores the sport. Most geeks are not basketball guys, Zarren says,
and most basketball guys are not geeks. You have to be both to be
successful in this developing field.
Whats the most efficient shot to take besides a layup? Easy, says
Zarren: a three-pointer from the corner. Whats one of the most
misused, misinterpreted statistics? Turnovers are way more
expensive than people think, Zarren says. Thats because most
teams focus on the points a defense scores from the turnover but
dont correctly value the offenses opportunity cost that is, the
points it might have scored had the turnover not occurred.
As for what the Celtics know about their own and opposing players
well, that information is guarded like the crown jewels. Off the
record and under duress, Zarren did reveal some valuable
information, but we judged credible his threat to hunt us down and
kill us if it were published. He waswilling to admit that Ray Allens
worth goes far beyond his perimeter shooting, that Rajon Rondos
rebounding was an undervalued asset, that Leon Powes
surprisingly strong play was not so surprising to the Celtics and
that, as transformative a player as Garnett was known to be, he has
generated a variety of offensive and defensive pluses that even the
Celtics didnt anticipate.
Zarren is also responsible for the Celtics basketball-related

technology and uses a service that delivers video footage tagged
with statistical information. With just a few mouse clicks, he can
call up every clip in which LeBron James of the Cleveland Cavaliers
has touched the ball at the top of the key and see whether he went
left or right, was double-teamed or not, passed or shot and, if the
latter, whether he missed, scored or was fouled. So if the Celtics
dampen Jamess scoring the next time they play a high-stakes game
against the Cavs, Zarren might be entitled to a smidgen of credit.
Still, there remains a significant universe of basketball statistics

that are simply not captured: each pass thrown and caught, each
players position on the floor at a given time, any number of angles
and proximities and nuances. Zarren lusts after such data and is
quietly pushing for a technological solution that would produce it.
One possibility: embed the floor of each N.B.A. arena with
electronic sensors and have the players wear microchips in their
sneakers.
The last few decades have been sad ones for the Celtics, marked by
loss of life (including Len Bias, their 1986 first-round draft pick)
and losses on the court. All that gloom will dissipate if they can
manage to win their 17th championship this season. Other teams
will of course rush to mimic the Celtics formula beginning,
presumably, by trying to acquire a player like Kevin Garnett. But
there are a lot more Mike Zarrens in the world than there are Kevin
Garnetts, and they also happen to come with a much lower price
tag.
Not-So-Free Ride
The trouble with negative externalities
Americans drive too much. This isnt a political or moral argument;

its an economic one. How so?
Because there are all sorts of costs associated with driving that the
actual driver doesnt pay. Such a condition is known to economists
as a negative externality: the behavior of Person A (well call him
Arthur) damages the welfare of Person Z (Zelda), but Zelda has no
control over Arthurs actions. If Arthur feels like driving an extra 50
miles today, he doesnt need to ask Zelda; he just hops in the car
and goes. And because Arthur doesnt pay the true costs of his
driving, he drives too much.
What are the negative externalities of driving? To name just three:

congestion, carbon emissions and traffic accidents. Every time
Arthur gets in a car, it becomes more likely that Zelda and
millions of others will suffer in each of those areas.
Which of these externalities is the most costly to U.S. society?

According to current estimates, carbon emissions from driving
impose a societal cost of about $20 billion a year. That sounds like
an awful lot until you consider congestion: a Texas Transportation
Institute study found that wasted fuel and lost productivity due to
congestion cost us $78 billion a year. The damage to people and
property from auto accidents, meanwhile, is by far the worst. In a
2006 paper, the economists Aaron Edlin and Pinar Karaca-Mandic
argued that accidents impose a true unpaid cost of about $220
billion a year. (And thats even though the accident rate has fallen
significantly over the past 10 years, from 2.72 accidents per million
miles driven to 1.98 per million; overall miles driven, however, keep
rising.) So, with roughly three trillion miles driven each year
producing more than $300 billion in externality costs, drivers
should probably be taxed at least an extra 10 cents per mile if we
want them to pay the full societal cost of their driving.

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How can this be achieved? Higher tolls, especially variable tolls
like congestion pricing, are one option. This seems to have worked
well in London but was recently quashed in New York City, where
the political hurdles proved too high.
A higher gas tax might also work. If a typical car gets 20 miles to the
gallon, then the proper tax would be about $2 per gallon. But with
the current high market price for gas and the political hysterics
attached to it well, good luck with that one.
This brings us to automobile insurance. While economists may

argue that gas is poorly priced, that imbalance cant compare with
how poorly insurance is priced. Imagine that Arthur and Zelda live
in the same city and occupy the same insurance risk pool but that
Arthur drives 30,000 miles a year while Zelda drives just 3,000.
Under the current system, Zelda probably pays the same amount
for insurance as Arthur.
Photo
CreditPaul Sahre
While some insurance companies do offer a small discount for
driving less usually based on self-reporting, which has an obvious
shortcoming U.S. auto insurance is generally an all-you-can-eat
affair. Which means that the 27,000 more miles than Zelda that
Arthur drives dont cost him a penny, even as each mile produces
externalities for everyone. It also means that low-mileage drivers
like Zelda subsidize high-mileage drivers like Arthur.
Aaron Edlin first noticed this imbalance more than 15 years ago. I
was a graduate student at Stanford, he says, and I drove maybe
2,000 miles a year. But I paid roughly the same $1,000 as if Id
driven 10 times as much, which was a huge portion of my budget.
A few years later, Edlin was serving on the Presidents Council of
Economic Advisers when he floated an idea that economists had
long found attractive: pay-as-you-drive (PAYD) insurance. It
seemed like an obvious solution. Since no one expects to pay the
same price for, say, a 60-minute massage as they pay for a 15-
minute massage, why should people pay the same for insurance no
matter how many miles they drove?
The objection within the White House, Edlin recalls, was there
wasnt good academic research on the subject.
Edlin and a few others, including Jason Bordoff and Pascal Noel at
the Brookings Institution, have since done such research. It makes a
compelling case that PAYD insurance would work well, reducing the
carbon emissions, congestion and accident risk created by too much
driving while leading drivers to pay the true cost of their mileage.
Bordoff and Noel put the total social benefit at $52 billion a year.
The better news is that PAYD insurance is no longer just an

academic exercise. G.M.A.C. has begun using OnStar technology to
offer mileage discounts, and next month Progressive will roll out a
comprehensive PAYD plan called MyRate. Progressive, the huge
Ohio-based insurer that has long prided itself as an innovator, will
first offer the plan in six states, having run a similar pilot in three
other states. Drivers who sign up for MyRate will install a small
wireless device in their cars that transmits to Progressive not just
how many miles they drive but also when those miles are driven
and, to some extent, how they are driven: the device measures the
cars speed every second, from which Progressive can derive
acceleration and braking behavior. Which means that Progressive
will not only be able to charge drivers for the actual miles they
consume but will also better assess the true risk of each driver.
If PAYD is such a great idea, why has it taken so long? There are at
least three reasons: the tracking technology has only recently
become affordable; insurers were anxious about drivers privacy
concerns; and there was a substantial risk for whichever company
was first to offer PAYD on a large scale.
Participation in the MyRate program is voluntary, and thats where

the economics get interesting. As with most incentive changes,
there will be winners and losers. The clearest winners are people
like Zelda, who can drive the same distance they used to drive and
pay less. Whats less obvious is whether Progressive will be a
winner; there are, in fact, a couple of situations in which
Progressive could lose out. If all MyRate accomplishes is to give
Progressives low-mileage customers the rate cut they deserve, then
Progressive is doing little more than lowering its own revenues. It
could, of course, try to compensate by raising rates on all its high-
mileage Arthurs, but then theres nothing to stop Arthur from
buying his insurance elsewhere. (Of course, losing its riskiest
customers to other companies might also prove profitable for
Progressive.)
If, however, Progressive can corner the Zelda market by stealing

millions of Zeldas from other insurers, then it could make a killing
by being the first to sell accurately priced insurance for low-mileage
drivers. The bigger goal for society and the wild card in this or
any incentive shift is to create real behavior change. And that is
always easier said than done. But if Progressives PAYD insurance
can induce some of its high-mileage customers to drive less and
especially to drive more safely, resulting in smaller claims payouts
for Progressive and fewer negative externalities for everyone, then it
could truly be a win-win-win situation.
Except, perhaps, for Progressives rivals.

Bottom-Line Philanthropy
The Soccer Boy Effect
Brian Mullaneys epiphany occurred back in 1994 in Vietnam. He

was traveling as a board member with Operation Smile, a charity
that performed cleft-repair surgery on poor children around the
world. Because the organization flew in doctors and surgical
equipment from the United States, its time and capacity in a given
locale were limited. On every mission, 500 or 600 children would
show up begging for treatment, Mullaney recalls, but we could
only help 150. In a small Vietnamese village near the Chinese
border, there was one kid who played soccer every day with the
volunteers; they took to calling him Soccer Boy. When the mission
was over and Mullaney and the others drove away, he saw Soccer
Boy chasing after the groups bus, his cleft lip still unrepaired. We
were in shock how could he not have been helped? Thats when
Mullaney realized that charities like Operation Smile were badly in
need of a new business model or any business model at all, really
and he set out to invent one.
Rafe Fursts epiphany came just last year while attending a closed-
door conference in Grand Rapids, Mich., that featured some of the
most prominent cancer researchers in the United States. Furst
might not seem the likeliest person to be in such a room. He is best
known as a professional gambler, a proud member of a high-profile,
high-I.Q. poker gang known as the Tiltboys. He has an
undergraduate degree in symbolic systems and a graduate degree in
computer science, both from Stanford, and in 1999 he banked a
small fortune by selling an online promotions company he helped
found. (Disclosure: Furst is a friend of ours, and we are both
investors in a more recent start-up of his, its mission unrelated to
this article.)
Furst and some other Tiltboys began donating a portion of their

poker earnings to the Prevent Cancer Foundation, and in 2004 he
was invited to join its board. He viewed the Grand Rapids
conference as a way to learn more about cancer and how it was
being fought. Instead, he says: I fell down a rabbit hole. I saw that
there were some messed-up things going on here. The system is just
not designed to solve this problem. The cancer-research
community, he felt, was made up of countless well-meaning
individuals who, collectively, turned into a hive of competing
interests and misaligned incentives, where financing dollars and
even information were hoarded.
So Furst, too, conceived a new charitable business model. His idea

is little more than a commingling of two long-proven incentives:
prizes and profits. Inspired by the X Prize Foundations
sponsorship of innovations in space travel and other realms, Furst
wants to establish a giant prize, as much as $10 billion, that would
go to the party or parties that achieve a cure for cancer, as defined
by the prize committee.

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And where will that $10 billion come from? I dont want Bill
Gates, Furst says. I want your average millionaire down the block
who wants to make a difference. Furst says he believes the
landscape is thick with would-be philanthropists, especially
younger people, who would like nonprofits to operate a bit more
like the for-profit worlds they inhabit. This means establishing
realistic and powerful incentives.
Photo
CreditPaul Sahre
Cancer researchers would certainly be incentivized by the $10
billion prize. But how to incentivize the donors? Furst would offer
an annuity, similar to the annuities paid out by charitable-
remainder trusts. A donor to such a trust gives money or property
to a charity and receives an annuity based on its value until his or
her death. Thats a cool idea, Furst says. But I thought, How can
we make it so you dont have to die?
An early contributor to what might be called the Cure Cancer

Annuity Fund would receive as much as a 15 percent return on her
money until the $10 billion was fully funded; after that, she would
receive a 5 percent return. (This would be dependent, of course, on
the funds ability to generate such returns; Furst is confident that
some hedge-fund friends of his could make that happen.) The
annuity would stop only when the goal a cure for cancer was
reached and the principal was paid out to the winners. Fursts
greatest insight may be the recognition that, for many people, the
act of altruism is not as pure as it might seem. In this case, whatever
pain a donor may feel from giving is countered by the pleasure of
also getting something back.
For now, Fursts idea is still in the planning stage. Brian
Mullaneys idea, meanwhile, has already borne much fruit. The
incident in Vietnam with Soccer Boy made him realize, he says, that
cleft deformities are not a medical problem; theyre an economic
problem. As a philanthropist, offering surgery to only a fraction of
the children who needed it made him heartsick. As a businessman
at the time, he ran an advertising agency it made him cringe.
What store turns away 80 percent of its customers?
Mullaney helped conceive a plan. Instead of using Operation

Smiles hard-raised millions to fly doctors and equipment around
the world for limited engagements, what if the money were used
instead to train and equip local doctors to perform cleft surgery
year-round? Mullaney figured that the cost per surgery would drop
by at least 75 percent, and he saw no reason not to try it. Operation
Smiles leadership saw things differently, so Mullaney and a few
others left the organization and started a rival group, Smile Train.
Along the way, Mullaney got out of the advertising business and
became the new organizations president.
Smile Train works as a charity because it is run like a business.

Fixing a childs cleft lip or palate is a relatively cheap procedure
with outsize payoffs: cleft children in many countries are ostracized
and have a hard time going to school, getting jobs and marrying,
and the surgery reverses those disadvantages. Indeed, when
pitching a reluctant government, Mullaney refers to cleft children as
nonperforming assets who can soon be returned to the economic
mainstream. He fights bad incentives with better ones: when Smile
Train learned that midwives in Chennai, India, were being paid off
to smother baby girls born with cleft deformities, Mullaney started
offering midwives as much as $10 for each girl they instead took to
a hospital for surgery.
Smile Train has also harnessed technology to create efficiencies in

every aspect of its business, from fund-raising to charting patients
outcomes. It developed surgery-training software that helps educate
doctors around the world. There are high-tech quality-control
measures: using digital imaging, a Texas cleft expert grades a
random sample of operations performed by Smile Train doctors
around the world, in order to know which surgeons in, say, Uganda
or China need more training. These are the sort of innovations that
likely make Smile Train one of most productive charities, dollar for
deed, in the world. Over the last eight years, Smile Train has
performed more than 280,000 cleft surgeries in 74 of the worlds
poorest countries, raising some $84 million last year while
employing a worldwide staff of just 30 people.
Mullaney estimates that Smile Train is close to reaching a historic

break-even point: it will perform more operations each year than
the number of children born each year in developing countries with
cleft deformities. This means Smile Train may be well on its way to
putting itself out of business. That, Mullaney says, would be a
dream.
Unintended Consequences
The Case of the Red-Cockaded Woodpecker
One year from today, a new president moves into the White House.
This president will be eager to carry out any number of plans
including, surely, plans to help the segments of society that most
need help. Extending a helping hand, after all, is one of the great
privileges and responsibilities of the presidency.
But before charging ahead with such plans, the new president might
do well to first ask him- or herself the following question: What do a
deaf woman in Los Angeles, a first-century Jewish sandal maker
and a red-cockaded woodpecker have in common?
A few months ago, a prospective patient called the office of Andrew

Brooks, a top-ranked orthopedic surgeon in Los Angeles. She was
having serious knee trouble, and she was also deaf. She wanted to
know if her deafness posed a problem for Brooks. He had his
assistant relay a message: no, of course not; he could easily discuss
her situation using knee models, anatomical charts and written
notes.
The woman later called again to say she would rather have a sign-
language interpreter. Fine, Brooks said, and asked his assistant to
make the arrangements. As it turned out, an interpreter would cost
$120 an hour, with a two-hour minimum, and the expense wasnt
covered by insurance. Brooks didnt think it made sense for him to
pay. That would mean laying out $240 to conduct an exam for
which the womans insurance company would pay him $58 a loss
of more than $180 even before accounting for taxes and overhead.

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So Brooks suggested to the patient that they make do without the
interpreter. Thats when she told him that the Americans With
Disabilities Act (A.D.A.) allowed a patient to choose the mode of
interpretation, at the physicians expense. Brooks, flabbergasted,
researched the law and found that he was indeed obliged to do as
the patient asked unless, that is, he wanted to invite a lawsuit
that he would probably lose.
If he ultimately operated on the womans knee, Brooks would be
paid roughly $1,200. But he would also then need to see her for
eight follow-up visits, presumably with the $240 interpreter each
time. By the end of the patients treatment, Brooks would be solidly
in the red.
He went ahead and examined the woman, paying the interpreter

out of his pocket. As it turned out, she didnt need surgery; her knee
could be treated through physical therapy. This was a fortunate
outcome for everyone involved except, perhaps, for the physical
therapist who would have to pay the interpreters bills.
Brooks told several colleagues and doctor friends about his deaf
patient. They all said, If I ever get a call from someone like that,
Ill never see her, he says. This led him to wonder if the A.D.A.
had a dark side. Its got to be widely pervasive and probably not
talked about, because doctors are just getting squeezed further and
further. This kind of patient will end up getting passed on and
passed on, getting the runaround, not understanding why shes not
getting good care.
So does the A.D.A. in some cases hurt the very patients it is

intended to help? Thats a hard question to answer with the
available medical data. But the economists Daron Acemoglu and
Joshua Angrist once asked a similar question: How did the A.D.A.
affect employment among the disabled?
Photo

Their conclusion was rather startling and makes Andrew Brookss
hunch ring true. Acemoglu and Angrist found that when the A.D.A.
was enacted in 1992, it led to a sharp drop in the employment of
disabled workers. How could this be? Employers, concerned that
they wouldnt be able to discipline or fire disabled workers who
happened to be incompetent, apparently avoided hiring them in the
first place.
How long have such do-good laws been backfiring? Consider the
ancient Jewish laws concerning the sabbatical, or seventh year. As
commanded in the Bible, all Jewish-owned lands in Israel were to
lie fallow every seventh year, with the needy allowed to gather
whatever food continued to grow. Even more significant, all loans
were to be forgiven in the sabbatical. The appeal of such unilateral
debt relief cannot be overestimated, since the penalties for
defaulting on a loan at the time were severe: a creditor could go so
far as to take a debtor or his children into bondage.
So for a poor Jewish sandal maker having trouble with his loan
payments, the sabbatical law was truly a godsend. If you were a
creditor, however, you saw things differently. Why should you lend
the sandal maker money if he could just tear up the loan in Year
Seven? Creditors duly gamed the system, making loans in the years
right after a sabbatical, when they were confident they would be
repaid, but then pulling tight the purse strings in Years Five and
Six. The resulting credit drought was so damaging to poor people
that it fell to the great sage Hillel to fix things.
His solution, known as prosbul, allowed a lender to go to court and

pre-emptively declare that a specific loan would not be subject to
sabbatical debt relief, transferring the debt to the court itself and
thereby empowering it to collect the loan. This left the law
technically intact but allowed for lenders to once again make credit
available to the poor without taking on unwarranted risk for
themselves.
The fallow-land portion of the sabbatical law, meanwhile, was

upheld for centuries, but it, too, finally gained a loophole,
called heter mechira. This allowed for a Jew to temporarily sell
his land to a non-Jew and to continue farming it during the
sabbatical year and then buy it back immediately afterward a
solution that helped the modern state of Israel keep its agricultural
economy humming.
The trouble is that many of the most observant Israeli Jews reject
this maneuver as a sleight of hand that violates the spirit of the law.
Many of these traditionalists are also extremely poor. And so this
year, which happens to be a sabbatical year, the poorest Jews in
Israel who wish to eat only food grown on non-Jewish land are left
to buy imported goods at double or triple the regular price all in
order to uphold a law meant to help feed the poorest Jews in Israel.
Such well-meaning laws surely dont end up harming animals as

well, do they?
Consider the Endangered Species Act (E.S.A.) of 1973, which

protects flora and fauna as well as their physical habitats. The
economists Dean Lueck and Jeffrey Michael wanted to gauge the
E.S.A.s effect on the red-cockaded woodpecker, a protected bird
that nests in old-growth pine trees in eastern North Carolina. By
examining the timber harvest activity of more than 1,000 privately
owned forest plots, Lueck and Michael found a clear pattern: when
a landowner felt that his property was turning into the sort of
habitat that might attract a nesting pair of woodpeckers, he rushed
in to cut down the trees. It didnt matter if timber prices were low.
This happened less than two years ago in Boiling Spring Lakes, N.C.
Along the roadsides, an A.P. article reported, scattered brown
bark is all thats left of once majestic pine stands. As sad as this
may be, it isnt surprising to anyone who has examined the perverse
incentives created by the E.S.A. In their paper, Lueck and Michael
cite a 1996 developers guide from the National Association of
Home Builders: The highest level of assurance that a property
owner will not face an E.S.A. issue is to maintain the property in a
condition such that protected species cannot occupy the property.
One notable wrinkle of the E.S.A. is that a species is often declared

endangered months or even years before its critical habitats are
officially designated. This allows time for developers,
environmentalists and everyone in between to have their say at
public hearings. What happens during that lag time?
In a new working paper that examines the plight of the cactus

ferruginous pygmy owl, the economists John List, Michael Margolis
and Daniel Osgood found that landowners near Tucson rushed to
clear their property for development rather than risk having it
declared a safe haven for the owl. The economists make the
argument for the distinct possibility that the Endangered Species
Act is actually endangering, rather than protecting, species.
So does this mean that every law designed to help endangered
animals, poor people and the disabled is bound to fail? Of course
not. But with a government that is regularly begged for relief
these days, from mortgage woes, health-care costs and tax burdens
and with every presidential hopeful making daily promises to
address these woes, it might be worth encouraging the winning
candidate to think twice (or even 8 or 10 times) before rushing off
to do good. Because if there is any law more powerful than the ones
constructed in a place like Washington, it is the law of unintended
consequences.
The Stomach-Surgery Conundrum
Deborah Kattler Kupetz is a Los Angeles businesswoman and
mother of three who tries to watch her weight. Thats why she
recently bought two lifelike plastic models of human body fat from a
medical-supply company, a one-pound blob and a five-pound blob,
and put them on display in her kitchen.
By doing so, Kattler Kupetz wouldnt seem to have much in

common with Han Xin, a legendary Chinese general who lived more
than 2,000 years ago. But she does.
Upon entering one battle, Han assembled his soldiers with their
backs to a river so that retreat was not an option. With no choice
but to attack the enemy head-on, Hans men did just that.
This is what economists call a commitment device a means with

which to lock yourself into a course of action that you might not
otherwise choose but that produces a desired result. While not as
severe as Hans strategy, Kattler Kupetzs purchase of those fat
blobs was a commitment device, too: every mealtime, they force her
to envision what a few extra pounds of fat looks like.

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It is hard to think of anyone who employs commitment devices as
avidly as the overweight American. Perhaps you once bought a
yearlong gym membership or had a three-month supply of healthful
meals delivered to your doorstep. Maybe you joined friends in a
group diet or even taped your refrigerator shut. The popular new
weight-loss pill Alli, which partly blocks the bodys absorption of
fat, is a commitment device with real consequences: a person who
takes Alli and then eats too much fatty food may experience a bout
of oily diarrhea.
So how are all these commitment devices working? Not very well.
According to the Centers for Disease Control, one out of every three
American adults is obese. Which is why so many people have begun
to embrace a far more drastic commitment device, one that Han
Xin himself would probably applaud: surgery. This year, more than
200,000 weight-loss, or bariatric, operations will be performed in
the United States, a nearly ten-fold increase in just a decade. The
most prominent types are gastric bypass and laparoscopic
adjustable gastric banding (or Lap-Band), although there are a
few others. Each one works a bit differently, but the general aim is
to reduce the stomachs capacity and thereby thwart the appetite. If
all goes well, bariatric surgery leads to substantial weight loss,
especially among the morbidly obese.
Marc Bessler, director of the Center for Obesity Surgery at New

York-Presbyterian/Columbia University Medical Center, is an
innovator in the field who personally performs about 200 bariatric
operations a year. Because his own father was morbidly obese,
Bessler brings a personal zeal to his work. The whole time I was
growing up, he was so overweight he couldnt play ball with us, he
says. He died at age 54 from colon cancer. It may have been picked
up late because of his obesity.
Photo
CreditPaul Sahre and Jonathan Han

Bessler acknowledges that bariatric surgery has a checkered history.
In the past, it killed people, and it didnt work, he says. In the
late 1950s and early 1960s, even though it was effective for weight
loss, there was lots of complications and mortality. Then in the late
70s and early 80s, there were much better surgeries, but they
didnt really work that well. The weight would start coming back.
Technological innovations, especially the use of laparoscopic

procedures, have made for considerable gains in safety and efficacy.
While the operation is still dangerous in some circumstances one
study found that for a surgeons first 19 bariatric operations,
patients were nearly five times as likely to die than patients that the
surgeon later operated on the overall mortality rate is now in the
neighborhood of 1 percent.
But even if bariatric surgery doesnt kill you, there are things to
worry about. The operation often produces complications
physiological ones, to be sure, but also perhaps psychological ones.
A significant fraction of postbariatric patients acquire new
addictions like gambling, smoking, compulsive shopping
or alcoholism once they are no longer addicted to eating. In certain
cases, some people also learn to outfox the procedure by taking
in calories in liquid form (drinking chocolate syrup straight from
the can, for instance) or simply drinking and eating at the same
time. Surgery is also a lot more expensive than even the most lavish
diet, with a Lap-Band procedure costing about $20,000 and a
gastric bypass about $30,000.
But Bessler and other bariatric advocates argue that the upsides
outweigh the downsides, especially for a morbidly obese patient
whose quality of life is already suffering. While asking a bariatric
surgeon if bariatric surgery is a good idea might seem akin to asking
a barber if you need a haircut in fact, Bessler does consult for
companies in the industry the data seem to back up his claims:
not only do most patients keep off a significant amount of weight
but the other medical problems that accompany obesity are also
often assuaged. One recent analysis found that 77 percent of
bariatric-surgery patients with Type 2 diabetes experienced
complete resolution of their diabetes after the procedure; the
surgery also helps eliminate hypertension and sleep apnea. From an
economic standpoint, research suggests that the operation can pay
for itself within a few years because a postbariatric patient now
requires less medical care and fewer prescriptions. Thats why some
insurance companies cover bariatric surgery as more do, it will
likely lead to a further spike in the volume of operations. This is
especially good news for the hospitals that have already grown
dependent on the significant cash flow that bariatric surgery
generates.
There are at least two ways to think about the rise in bariatric
surgery. On the one hand, isnt it terrific that technology has once
again solved a perplexing human problem? Now people can eat all
they want for years and years and then, at the hands of a talented
surgeon, suddenly bid farewell to all their fat. There are risks and
expenses of course, but still, isnt this what progress is
all about?
On the other hand, why is such a drastic measure called for? Its one
thing to spend billions of dollars on a disease for which the cause
and cure are a mystery. But thats not the case here. Even those who
argue that obesity has a strong genetic component must
acknowledge, as Bessler does, that the amount of obesity has
skyrocketed in the past 30 years, but our genetic makeup certainly
hasnt changed in that time.
So the cause is, essentially, that people eat too much; and the cure
is, essentially, to eat less. But bariatric surgery seems to fit in nicely
with the tenor of our times. Consider, for instance, the game shows
we watch. The old model was Jeopardy!, which required a player
to beat her opponents to the buzzer and then pluck just the right
sliver of trivial knowledge from her vast cerebral storage network.
The current model is Deal or No Deal, which requires no talent
whatsoever beyond the ability to randomly pick a number on a
briefcase.
Maybe the problem is that despite all the diets and exercise regimes
and gimmicks that have been put into play during our national bout
of obesity, the right nonsurgical solution simply hasnt yet been
found. So heres a suggestion: Hang around your neck a small
Ziploc bag containing a towelette infused with an aroma of, well, of
something deeply disgusting. (In the interest of not offending
anyone who happens to be reading this over breakfast, we wont
offer specific suggestions, but you can surely conjure a horrid odor
on your own.) Every time youre about to open the refrigerator or
look over a menu, unzip the bag and take a whiff. Now thats a
commitment device.
The Jane Fonda Effect
Nuclear Energy
If you were asked to name the biggest global-warming villains of the past 30
years, heres one name that probably wouldnt spring to mind: Jane Fonda.
But should it?
In the movie The China Syndrome, Fonda played a California TV reporter

filming an upbeat series about the states energy future. While visiting a
nuclear power plant, she sees the engineers suddenly panic over what is
later called a swift containment of a potentially costly event. When the
plants corporate owner tries to cover up the accident, Fondas character
persuades one engineer to blow the whistle on the possibility of a meltdown
that could render an area the size of Pennsylvania permanently
uninhabitable.
The China Syndrome opened on March 16, 1979. With the no-nukes
protest movement in full swing, the movie was attacked by the nuclear
industry as an irresponsible act of leftist fear-mongering. Twelve days later,
an accident occurred at the Three Mile Island nuclear plant in south-central
Pennsylvania.
Michael Douglas, a producer and co-star of the film he played Fondas

cameraman watched the T.M.I. accident play out on the real TV news,
which interspersed live shots from Pennsylvania with eerily similar scenes
from The China Syndrome. While Fonda was firmly anti-nuke before
making the film, Douglas wasnt so dogmatic. Now he was converted on the
spot. It was a religious awakening, he recalled in a recent phone interview.
I felt it was Gods hand.

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Fonda, meanwhile, became a full-fledged crusader. In a retrospective
interview on the DVD edition of The China Syndrome, she notes with
satisfaction that the film helped persuade at least two other men the
father of her then-husband, Tom Hayden, and her future husband, Ted
Turner to turn anti-nuke. I was ecstatic that it was extremely
commercially successful, she said. You know the expression We had legs?
We became a caterpillar after Three Mile Island.
The T.M.I. accident was, according to a 1979 Presidents Commission report,

initiated by mechanical malfunctions in the plant and made much worse by
a combination of human errors. Although some radiation was released,
there was no meltdown through to the other side of the Earth no China
syndrome nor, in fact, did the T.M.I. accident produce any deaths,
injuries or significant damage except to the plant itself.
What it did produce, stoked by The China Syndrome, was a widespread

panic. The nuclear industry, already foundering as a result of economic,
regulatory and public pressures, halted plans for further expansion. And so,
instead of becoming a nation with clean and cheap nuclear energy, as once
seemed inevitable, the United States kept building power plants that burned
coal and other fossil fuels. Today such plants account for 40 percent of the
countrys energy-related carbon-dioxide emissions. Anyone hunting for a
global-warming villain cant help blaming those power plants and cant
help wondering too about the unintended consequences of Jane Fonda.
But the big news is that nuclear power may be making a comeback in the
United States. There are plans for more than two dozen new reactors on the
drawing board and billions of dollars in potential federal loan guarantees.
Has fear of a meltdown subsided, or has it merely been replaced by the fear
of global warming?
Photo
CreditPaul Sahre and Loren Flaherty

The answer may lie in a 1916 doctoral dissertation by the legendary
economist Frank Knight. He made a distinction between two key factors in
decision making: risk and uncertainty. The cardinal difference, Knight
declared, is that risk however great can be measured, whereas
uncertainty cannot.
How do people weigh risk versus uncertainty? Consider a famous

experiment that illustrates what is known as the Ellsberg Paradox. There are
two urns. The first urn, you are told, contains 50 red balls and 50 black
balls. The second one also contains 100 red and black balls, but the number
of each color is unknown. If your task is to pick a red ball out of either urn,
which urn do you choose?
Most people pick the first urn, which suggests that they prefer a measurable
risk to an immeasurable uncertainty. (This condition is known to
economists as ambiguity aversion.) Could it be that nuclear energy, risks
and all, is now seen as preferable to the uncertainties of global warming?
France, which generates nearly 80 percent of its electricity by nuclear
power, seems to think so. So do Belgium (56 percent), Sweden (47 percent)
and more than a dozen other countries that generate at least one-fourth of
their electricity by nuclear power. And who is the worlds single largest
producer of nuclear energy?
Improbably enough, that would be . . . the United States. Even though the
development of new nuclear plants stalled by the early 1980s, the countrys
104 reactors today produce nearly 20 percent of the electricity the nation
consumes. This share has actually grown over the years along with our
consumption, since nuclear technology has become more efficient. While the
fixed costs of a new nuclear plant are higher than those of a coal or natural-
gas plant, the energy is cheaper to create: Exelon, the largest nuclear
company in the United States, claims to produce electricity at 1.3 cents per
kilowatt-hour, compared with 2.2 cents for coal.
Nuclear enthusiasm may be on the rise, but it can always be dampened by

mention of a single word: Chernobyl. The 1986 Ukrainian disaster killed at
least a few dozen people directly and exposed millions more to radiation. A
new study by the economists Douglas Almond, Lena Edlund and Marten
Palme shows that as far away as Sweden, in areas where the wind carried
Chernobyl fallout, babies who were in utero at the time later had
significantly worse school outcomes than other Swedish children.
But coal, too, has its costs, even beyond the threat of global warming. In the
United States, an average of 33 coal miners are killed each year. In China,
more than 4,700 coal miners were killed last year alone a statistic that the
Chinese government has trumpeted as a vast improvement.
The accident at Three Mile Island ruined one of the two reactors on the site.
The other one, operated by Exelon, continues to quietly churn out electricity
for 800,000 customers. Outside the plants training center is a small
vegetable garden enclosed in chain-link fencing: corn, tomatoes, beets. Its
output is monitored to detect radiation. Although the garden was badly in
need of watering during a recent visit, the vegetables were otherwise fine.
Inside, Christopher Crane, the chief operating officer of Exelon Generation,

held forth on the barriers that the nuclear industry must clear before new
plants can be built. Among them: the longstanding issue of how to dispose of
spent fuel and whether the public has shaken its fear of new nuclear
reactors. Crane sat in a conference room within the T.M.I. compound. The
view outside was bleak: large, windowless buildings; fencing topped by razor
wire; bulletproof sniper stands. Security at all nuclear plants has been
heightened since 9/11. If you didnt know better, you would think you were
looking at a maximum-security prison.
This similarity suggests an answer to Cranes point about public acceptance

of new nuclear construction. There was a time when people didnt want new
prisons built in their backyards until they decided that the risk was
relatively low and that the rewards, in jobs and tax dollars, were substantial.
Will nuclear plants ultimately get the same embrace? The market seems to
think so Exelon stock has tripled in the past five years but it may all
depend on what kind of thrillers Hollywood has in the pipeline.
Payback Time
The Cash-Back Mortgage
Imagine for a moment that you are looking to buy a first home for
yourself, your spouse and your 1-year-old darling. Now imagine that
you are doing this in Italy.
The housing market in Italy is quite different from ours. Its harder
to get mortgage credit, and you can typically borrow only 50
percent of the purchase price. Moreover, the loan might have to be
repaid in just 10 years. So before buying your first house, youll
probably have to spend a lot of years saving up your salary for a
down payment. As a result, you may well end up living with your
parents (or gulp your in-laws) until you are deep into your 30s.
In the United States, meanwhile, mortgage credit flows like milk

and honey. By putting down just a fraction of the purchase price,
you can move your family right in, with 30 years to pay off the
mortgage.
But what if you cant scare up the cash for even a small down
payment? Without it, you fall firmly into the category of what are
now infamously known as subprime borrowers. There are plenty of
options for subprime customers, but most of those options, as noted
in the small type on the contracts the borrowers sign, arent very
good.

RELATED COVERAGE
As is the case with any worthwhile goal, some people employ the
most time-honored solution for getting what they dont quite
deserve: they cheat. In some cases, the cheating involves an illegal
sleight-of-hand maneuver known as the cash-back transaction. As
one of the trickiest forms of mortgage fraud there are many
others the cash-back transaction is hardly unknown among real
estate insiders, but it has largely escaped academic scrutiny. Until
now.
Itzhak Ben-David, a Ph.D. candidate in finance at the University of

Chicago Graduate School of Business, fell into the subject while
pursuing a drier one: the degree to which housing prices efficiently
incorporate anticipated tax increases. (Disclosure: one of this
columns authors, Steven Levitt, sits on Ben-Davids dissertation
committee.) A 36-year-old Israeli, Ben-David had served for four
and a half years in the Israeli Army, studied industrial engineering
and accounting and worked at a real estate company in Britain. He
thought he knew pretty well how the world operated. But as he
immersed himself in Chicago real estate for his dissertation
research, he came to wonder how well he and his fellow academics
truly understood the market.
For instance, as he interviewed mortgage brokers, real estate agents

and bank loan officers, he heard regular mention of a mysterious
kind of deal in which the seller gave the buyer a cash rebate without
noting this transaction in the mortgage paperwork. (It is illegal for
buyers and sellers to transfer cash or assets without properly
notifying the lender.) Of course, none of the people that he
interviewed copped to this practice. But sometimes the signs of a
cash-back transaction were, quite literally, out in the open for all to
see, on banners hanging from for-sale properties or in printed real
estate ads.
How does this kind of deal work?
Pretend that you want to buy a house that costs $200,000 but dont
have $20,000 to make the 10 percent down payment that would get
you a decent mortgage. The sellers real estate agent offers a
solution: lets make the official purchase price $220,000 instead of
$200,000, he says but in return, the seller will give you $20,000
in cash. This rebate will be a separate transaction, the agent
explains, which doesnt need to be written into the mortgage
paperwork. (A seller can legally offer a cash-back incentive, but it
would have to be reported to the bank which would negate the
advantage of having the bank think that the buyer already has the
cash.)
Voil! Suddenly you have the $20,000 in cash necessary to get a

good mortgage, and the seller still nets his original price of
$200,000. The only difference is that the bank records the sale of
the house at an inflated $220,000. And, instead of borrowing 90
percent of the value of the house, you have in fact borrowed 100
percent. In short, Ben-David writes, a buyer can purchase the
property with no down payment.
It was all well and good for Ben-David to have learned, anecdotally,
how cash-back transactions work but how could he isolate such
behavior in the data? Since the transactions were illegal, they
wouldnt be recorded. So using the data from nearly 300,000
Chicago-area home sales, he began to play detective, seeking out
telltale signs of the scam.
First he built a dictionary of 150 keywords in real estate ads

creative financing, for instance that might signal a sellers
willingness to play loose. He then looked for instances in which a
house had languished on the market and yet wound up selling at or
even above the final asking price. In such cases, he found that
buyers typically paid a very small down payment; the smaller the
down payment, in fact, the higher the price they paid for the house.
What could this mean? Either the most highly leveraged buyers
were terrible bargainers or, as Ben-David concluded, such
anomalies indicated the artificial inflation that marked a cash-back
deal.
Having isolated the suspicious transactions in the data, Ben-David

could now examine the noteworthy traits they shared. He found
that a small group of real estate agents were repeatedly involved, in
particular when the seller was himself an agent or when there was
no second agent in the deal. Ben-David also found that the suspect
transactions were more likely to occur when the lending bank,
rather than keeping the mortgage, bundled it up with thousands of
others and sold them off as mortgage-backed securities. This
suggests that the issuing banks treat suspect mortgages with
roughly the same care as you might treat a rental car, knowing that
you arent responsible for its long-term outcome once it is out of
your possession.
At first glance, these cash-back transactions, while illegal, might

seem a victimless crime. After all, the seller gets his house sold and
the buyer gets to move in with his family. The real estate agent, the
mortgage broker, the attorney and the appraiser are all paid their
commissions or fees. Even the bank that made the loan comes out
ahead, since it earned its fees on the transaction before passing
along the mortgage to investors.
But Ben-David argues that there are at least two potential losers.
The first is the honest buyer who wont take a cash-back offer and
therefore cant buy a house all while the illegal cash-back
transactions are artificially driving up home prices in his
neighborhood.
The second loser is the investor who bought the mortgage-backed

securities. If a house purchased with a cash-back transaction goes
into foreclosure, it is soon discovered that the home is worth less
than the value of the loan. This, plainly, is not good for the
shareholders of such assets. While people who hate rich people may
get a thrill from the idea of wealthy shareholders being swindled by
a bunch of small-time mortgage hustlers, keep in mind that
mortgage-backed securities are the sort of conservative investment
widely held by pensioners and other regular folks.
Theres a third potential loser as well: the subprime buyer who does
accept the cash-back payment but still ends up defaulting on the
loan. Although his criminal act will probably never be prosecuted,
he stands to face an even harsher sentence: moving back in with the
in-laws.
Laid-Back Labor
The $140 Homemade Scarf
During the late 19th century, piano manufacturing was one of New
York Citys largest industries. Every right-minded American family,
it seemed, wanted to fill its home with music. The advent of the
player piano a music-making machine that required zero talent
drove the boom even further. By the 1920s, some 300,000 pianos
were being sold in the United States each year, roughly two-thirds
of them player pianos.
But a pair of newer technologies, the radio and the phonograph,

soon began to drive the piano into a deep disfavor that continues to
this day. Last year, Americans bought only 76,966 pianos. Thats a
decrease of 75 percent over a period in which the population more
than doubled. As much as people may love music, most of them
apparently dont feel the need to make it for themselves. According
to Census Bureau statistics, only 7.3 percent of American adults
have played a musical instrument in the past 12 months.
Compare this with the 17.5 percent of adults who currently engage
in what the Census Bureau calls cooking for fun. Or consider that
41 percent of households have flower gardens, 25 percent raise
vegetables and 13 percent grow fruit trees even though just 1
percent of Americans live on a farm today, down from 30 percent in
1920. On a more personal note: one of the authors of this column
has a sister who runs a thriving yarn store, while the other is
married to a knitting devotee who might buy $40 worth of yarn for
a single scarf and then spend 10 hours knitting it. Even if her labor
is valued at only $10 an hour, the scarf costs at least $140 or
roughly $100 more than a similar machine-made scarf might cost.
Isnt it puzzling that so many middle-aged Americans are spending

so much of their time and money performing menial labors when
they dont have to? Just as the radio and phonograph proved to be
powerful substitutes for the piano, the forces of technology and
capitalism have greatly eased the burden of feeding and clothing
ourselves. So whats with all the knitting, gardening and cooking
for fun? Why do some forms of menial labor survive as hobbies
while others have been killed off? (For instance, we cant think of a
single person who, since the invention of the washing machine,
practices laundry for fun.)
Economists have been trying for decades to measure how much
leisure time people have and how they spend it, but there has been
precious little consensus. This is in part because its hard to say
what constitutes leisure and in part because measurements of
leisure over the years have not been very consistent.

RELATED COVERAGE
Economists typically separate our daily activities into three
categories: market work (which produces income), home
production (unpaid chores) and pure leisure. How, then, are we to
categorize knitting, gardening and cooking? While preparing meals
at home can certainly be much cheaper than dining out and
therefore viewed as home production, what about the cooking for
fun factor?
Photo

In an attempt to address such gray areas, the economists Valerie A.
Ramey and Neville Francis classified certain home activities as
labor and others as leisure. In their recent paper A Century of
Work and Leisure, they employed a 1985 time-use survey in which
people ranked their enjoyment of various activities on a scale of 0 to
10. Knitting, gardening and cooking were in the middle of the scale,
with a 7.7, 7.1 and 6.6, respectively. These ranked well behind the
three favorite activities sex, playing sports and fishing (which
scored 9.3, 9.2 and 9.1) but firmly ahead of paying bills, cleaning
the house and, yes, doing the laundry (5.2, 4.9 and 4.8).
But heres where it gets tricky. Ramey and Francis decided that
anything at or above a 7.3 is leisure, while anything below is home
production. (Knitting, therefore, makes the grade as leisure;
gardening and cooking do not.) This leads them to calculate that we
spend less time doing market work today than we did in 1900 but
more time in home production. Men, it seems, have contributed
mightily to this upsurge: in 1920, employed men spent only two or
three hours a week on home production, but they averaged 11 hours
by 1965 and 16 hours by 2004.
But how many of those home-production hours are in fact leisure

hours? This, it seems, is the real question here: What makes a
certain activity work for one person and leisure for another?
With no disrespect toward Ramey and Francis, how about this for
an alternative definition: Whether or not youre getting paid, its
work if someone else tells you to do it and leisure if you choose to
do it yourself. If you are the sort of person who likes to mow his
own lawn even though you can afford to pay someone to do it,
consider how youd react if your neighbor offered to pay you the
going rate to mow his lawn. The odds are that you wouldnt accept
his job offer.
And so a great many people who can afford not to perform menial
labor choose to do so, because well, why? An evolutionary
biologist might say that embedded in our genes is a drive to feed
and clothe ourselves and tame our surroundings. An economist,
meanwhile, might argue that we respond to incentives that go well
beyond the financial; and that, mercifully, we are left free to choose
which tasks we want to do ourselves.
Granted, these choices may say a good bit about who we are and
where we come from. One of us, for instance (the economist, who
lives in Chicago), grew up comfortably in a Midwestern city and has
fond memories of visiting his grandparents small farm. This author
recently bought an indoor hydroponic plant grower. It cost about
$150 and to date has produced approximately 14 cherry tomatoes
which, once you factor in the cost of seeds, electricity and even a
nominal wage for the labor, puts the average price of a single
tomato at roughly $20.
The other one of us (the journalist, who lives in New York) grew up
on a small farm and was regularly engaged in all sorts of sowing,
mucking and reaping. He, therefore, has little vestigial desire to
grow his own food but he is happy to spend hours shopping for
and preparing a special dinner for family and friends. Such dinners,
even if the labor were valued at only $10 an hour, are more
expensive than a commensurate takeout meal.
Maybe someday the New York guy will get to cook a meal with some
of the Chicago guys cherry tomatoes. Add in another $32 for next-
day shipping, and it might become one of the most expensive meals
in recent memory and, surely, worth every penny.
Identity Crisis
Counting the Cost of a Chargeback
Steven Peisner stabbed excitedly at his computer keyboard, trolling

through a chat room where identity fraudsters buy and sell names,
addresses, Social Security numbers and PINs. Some of the hustlers
are American, but others are from Russia, India, the Philippines,
Nigeria, Vietnam, Iran any place, really, where young men and
computers cohabit.
How does this market work? If someone has just hacked a hospital
database and come away with 10,000 fulls (a full set of personal
information, down to your mothers maiden name), hell post his
asking price (typically $10 to $30 per full, depending on the
freshness), along with a sampling of the data to prove its legitimacy.
Fraudsters also post specific queries. Heres one, Peisner said,
reading from his screen: Need female WU confirmer. Your share:
40 percent. That means they need someone to go to the Western
Union office in some coffee shop in Romania to pick up the cash
because Vlad can do a lot of things, but he cant be Amy Weiss from
Manhattan Beach, Calif.
There are as many varieties of identity theft today as there are

varieties of, say, mushrooms. And there are nearly as many
misconceptions about the scope of the problem, the incentives to
stop it and how its costs are borne. For starters, there are indications
that identity theft has peaked. A recent study by Javelin Strategy and
Research claimed that 8.4 million U.S. adults suffered some form of
identity fraud in 2006, down from 10.1 million in 2002. Bear in mind
that the Javelin study was paid for in part by three financial-services
institutions, which certainly have an incentive to alleviate customer
fears. But the Federal Trade Commission also reports a leveling off, as
does the Los Angeles County Sheriffs Department, which runs one of
the most aggressive identity-theft task forces in the country.
Still, for those so inclined, identity theft remains an extraordinarily

appealing crime. In his new book, Stealing Your Life, the reformed
fraudster Frank Abagnale calls identity theft an elementary crime
with enormous upside and a minuscule chance of being caught.
Most police departments dont have the staffing or know-how to even
pursue the perpetrators; the F.B.I., meanwhile, usually wont get
involved unless the fraud reaches $100,000.
Which raises an obvious question: If law enforcement doesnt care
about identity theft, who does?
The answer would also seem obvious: You, the potential victim. But
according to the Javelin data, people probably worry way too much
about identity theft. Seventy-three percent of victims incur no out-of-
pocket expenses whatsoever; the unlucky minority loses, on average,
$2,000 hardly chump change but far less than the scare stories
would have us believe. And in more than half the cases of identity
theft, the thief is not a stranger at all but rather a relative, friend or
co-worker.

RELATED COVERAGE
So while you were being frightened into never again using a credit
card, and perhaps shredding your childs report card, most of the cost
of identity theft was actually being paid by someone else.
Photo
CreditIllustration by Paul Sahre and Loren Flaherty

Surely, then, it is the banks and credit-card companies that are
desperate to stop the problem? Sgt. Robert Berardi, who runs the Los
Angeles County Sheriff Departments ID Theft Task Force, has found
otherwise. The banks are in conflict between security and making a
profit, he says. In an industry that is reluctant to add even an ounce
of friction to a customers purchase, Berardi says identity theft is seen
as simply the cost of doing business. Indeed, a recent report by
TowerGroup, a research firm owned by MasterCard Worldwide, noted
that banks are not yet ready to dedicate resources to solving any ID
theft problem.
So if the banks, the consumer and the police arent sufficiently

incentivized to stop identity theft, who is?
The merchant. That is what Peisner, a 44-year-old veteran of the

credit-card business, has discovered. Lets say one of these hackers
takes the information they find in a chat room, he says. He goes to
the Sony Web site, buys a laptop computer for $1,000, and a month
later the actual cardholder gets the billing statement. He calls up his
bank and says, I didnt order a computer from Sony. At that point,
the credit-card issuer, lets say Citibank, sends a chargeback through
the interchange system to the acquiring bank, and that $1,000 is
taken right out of Sonys bank account, and they also get hit with a
$25 chargeback fee. So the merchant has lost the money from the
sale (as well as the laptop) while paying the chargeback fee, other
bank fees and processing and shipping costs. If youre a merchant,
Peisner says, you have all the liability.
And, therefore, all the incentive to stop the crime. That is why Peisner
recently started a company, Sell It Safe, which aims to help merchants
and banks screen their customers in online and telephone
transactions. His main weapon is a massive live database of stolen
personal information, which a merchant can instantaneously check to
learn whether Amy Weiss is really Amy Weiss or if perhaps she is
really Vlad. In an era when information flows like water, Peisner is
hoping to add a filter onto a few million faucets.
Along the way, he has become a good Samaritan. When he comes

upon stolen data in a hacker chat room, Social Security numbers and
passwords strewn about like underwear after a burglary, he often
personally calls the victims. He reads off enough information to
convince them of their misfortune and advises them to notify the
police and the bank. Usually, they assume at first that he is a hustler
himself, or at least a nut. But ultimately they are grateful. Peisner is
helping them out, after all, and he doesnt gloat.
This may be because Peisner himself recently responded to a phony e-

mail message, commonly known as a phish, that supposedly came
from eBay. He was in the throes of bidding on a Jack Nicklaus
personal credit card Peisner collects credit-card memorabilia with a
passion bordering on mania when he received the eBay phish
telling him that his account would be suspended if he didnt update
his personal information. I thought, It expires in 10 minutes I
better go in and turn my account back on, he recalls.
If it could happen to Peisner, it could happen to anyone. In a recent

academic paper called Why Phishing Works, three computer
scientists (one from Harvard and two from Berkeley) ran a study and
found that the best phishing site was able to fool more than 90
percent of participants.
Fortunately, most phishing sites are not designed by top-tier

computer scientists with good English skills. One day recently,
Peisner discovered a fake Bank of America Web site that asked for a
customers account number, online ID, PIN, Social Security number
and address. Only at the end of the form was the sites illegitimacy
and the creators foreign origin revealed, when it asked for
information that should have baffled any American customer: Father
Maiden Name.
The Gift-Card Economy
Best Buy's $16 Million Windfall
What do a gym membership, a bottle of prescription pills and a

holiday gift card have in common? Each of them is a thing that is
bought and then often goes unused.
In their recent paper Paying Not to Go to the Gym, the economists

Stefano DellaVigna and Ulrike Malmendier showed that people who
buy an annual membership to a health club overestimate by more
than 70 percent how much theyll actually use it. Many people,
therefore, would be better off buying monthly or daily passes.
The Cochrane Collaboration, an evidence-based health-care research

group, recently issued a report about patients who fail to take their
medicine. People who are prescribed self-administered medications,
it began, typically take less than half the prescribed doses. While
this may be more troubling as a medical issue than a financial one, it
is nevertheless true that the medicine cabinets of America are stuffed
with billions of dollars of unused prescriptions.
As for gift cards well, lets just say there is good reason that they are
known within the retail industry as a stored-value product: they store
their value very well, and often permanently. The financial-services
research firm TowerGroup estimates that of the $80 billion spent on
gift cards in 2006, roughly $8 billion will never be redeemed a
bigger impact on consumers, Tower notes, than the combined total
of both debit- and credit-card fraud. A survey by Marketing
Workshop Inc. found that only 30 percent of recipients use a gift card
within a month of receiving it, while Consumer Reports estimates that
19 percent of the people who received a gift card in 2005 never used
it.

RELATED COVERAGE
Considering that two-thirds of all holiday shoppers in 2006 planned
to give someone else a gift card, you most likely received one yourself
in recent weeks. Perhaps you are among the exceptional minority, and
you have already spent it, or soon will. But the odds say that it has
instead wound up in your sock drawer.
Does this mean that a gift card is a bad gift? The answer depends on
whom you ask, and it also requires the asking of a separate question:
What is gift-giving meant to accomplish in the first place?
An economist might describe a gift as a signaling mechanism that

allows one person to tell another person that she: a) is thinking about
him; b) cares about him; and c) wants to give him something that hell
value.
Photo
CreditIllustration by Knickerbocker
Of course there are many different types of recipients and
relationships. Its quite easy to give gifts to people who dont have the
money or the wherewithal to get things for themselves children, for
instance. Since a child cant drive himself to Toys R Us and probably
doesnt have much money of his own, by giving him a toy you are
substantially expanding the set of things he has access to. Which
makes nearly any gift meaningful.
With adults, its a bit trickier. An adult is free to buy whatever he

wants, and presumably he knows what he likes. So ideally, youd want
to give him something he might like but doesnt know about, or some
kind of guilty pleasure that he wouldnt buy for himself. In either case,
you are creating value for the recipient by giving him something that
is actually worth more to him than the money you spent on it.
But realistically, most of our gifts fall well short of that high standard.
This creates a lot of inefficiency. In 1993, the economist Joel
Waldfogel addressed this subject in a paper whose continuing fame in
economics circles is due in part to its wonderfully Scrooge-ish title:
The Deadweight Loss of Christmas. Since gifts may be mismatched
with the recipients preferences, Waldfogel argued, it is likely that
the gift will leave the recipient worse off than if she had made her
own consumption choice with an equal amount of cash. He
concluded that holiday gift-giving destroys between 10 percent and a
third of the value of gifts.
If gift-giving destroys so much value, why not take the most efficient
route and simply give cash? Obviously, some people do. In the small
survey of Yale undergraduates on which Waldfogel based his paper,
grandparents gave cash 42 percent of the time, and parents gave cash
10 percent of the time. But not once did a student receive cash from
his or her significant other. Plainly, there are a few relationships for
which a cash gift is appropriate, but in most cases, the social taboo
crushes the economists dream of such a beautifully efficient
exchange.
So if cash is inappropriate, and buying gifts is inefficient, wouldnt a

gift card not quite as fungible as cash but also not nearly as
coldhearted be a perfect solution?
You could certainly make that case. And for the merchant, at least, the
gift card is a godsend. Just think of it: In the weeks leading up to
Christmas, millions of people visit your store or Web site and hand
you billions of dollars in exchange for nothing more than a plastic
I.O.U. that may never even be redeemed. Best Buy, for instance,
earned $16 million last year in gift-card breakage, which is the
industrys term for card value that was bought but never redeemed.
Then theres what retailers call upspending: most customers who do
use their gift cards spend some of their own money to buy
merchandise that is more expensive than the value of the card.
For the giver, meanwhile, a gift card could hardly be easier. But most
economists would argue that if a gift card is so transparently good for
the giver, it is necessarily bad for the recipient: the fact that it can be
bought so easily signals to the recipient that the giver didnt put much
effort into the gift.
In the end, the value of any gift is overwhelmingly dependent on the

nature of the relationship between giver and recipient. The economist
Alex Tabarrok, writing recently on the Marginal Revolution blog, put
an even finer point on this fact, noting that each of us has many
selves, including a wild self, and that we want the wild self in
someone else to be wild about us. His advice? If you want to please
the economist in me, send me cash. If you want to please my wild self
(you know who you are!), use your imagination.
So next year, if you need a gift for a strict rationalist, consider cash. If
you want to appeal to someones wild self, youll have to use your
imagination. And if youre hoping to send a little something extra to
the shareholders of Best Buy or the Gap or Tiffany, consider a gift
card.
The Price of Climate Change
The famous old quip about the weather everyone talks about it but
nobody does anything about it is not as true as it once was.
Alarmed by the threat of global warming, lots of people are actively
trying to change human behaviors in order to change the weather.
Even economists are getting into the weather business. Olivier

Deschnes of the University of California at Santa Barbara and
Michael Greenstone of the Massachusetts Institute of Technology
have written a pair of papers that assess some effects of climate
change. In the first, they use long-run climatological models year-
by-year temperature and precipitation predictions from 2070 to 2099
to examine the future of agriculture in the United States. Their
findings? The expected rises in temperature and precipitation would
actually increase annual agricultural production, and therefore
agricultural profits, by about 4 percent, or $1.3 billion. This hardly
fulfills the doomsday fears conjured by most conversations about
global warming.
For other economists, meanwhile, the weather itself has proved useful
in measuring wholly unrelated human behaviors. From an
economists perspective, the great thing about the weather is that
there is nothing humans can do to affect it (at least until recently).
Contrast this with social changes that people enact: a new set of laws,
for instance. Very often, new laws come about when there is a
perception that a big social problem think violent crime or
corporate fraud is growing worse. After a while, and after the laws
have been enacted, the problem diminishes. So did the new laws fix
the problem, or would it have improved on its own? Politicians will
surely claim that it was their laws that fixed the problem, but its hard
to know for sure.

RELATED COVERAGE
The weather, however, is different; the beauty of weather is that it
does its own thing, and whether the weather is good or bad, you can
be pretty sure that it didnt come about in response to some human
desire to fix a problem. Weather is a pure shock to the system, which
means that it is a valuable tool to help economists make sense of the
world.
Photo
CreditPaul Sahre
Consider 19th-century Bavaria. The problem there was rain too
much of it. As Halvor Mehlum, Edward Miguel and Ragnar Torvik
explained in a recent paper, excessive rain damaged the rye crop by
interfering with the planting and the harvest. Using a historical
rainfall database from the United Nations, they found that the price of
rye was significantly higher in rainy years, and since rye was a major
staple of the Bavarian diet, food prices across the board were
considerably higher in those years, too. This was a big problem, since
a poor family at the time would have been likely to spend as much as
80 percent of its money on food. The economists went looking for
other effects of this weather shock. It turns out that Bavaria kept
remarkably comprehensive crime statistics the most meticulous in
all of Germany and when laid out one atop the other, there was a
startlingly robust correlation between the amount of rain, the price of
rye and the rate of property crime: they rose and fell together in
lockstep. Rain raised food prices, and those prices, in turn, led hungry
families to steal in order to feed themselves.
But violent crime fell during the rainy years, at the same time
property crimes were on the rise. Why should that be? Because, the
economists contend, rye was also used to make beer. Ten percent of
Bavarian household income went to beer purchases alone, they write.
So as a price spike in rye led to a price spike in beer, there was less
beer consumed which in turn led to fewer assaults and murders.
It turns out that rainfall often has a surprisingly strong effect on

violence. In a paper on the economic aftermath of the hundreds of
riots in American cities during the 1960s, William Collins and Robert
Margo used rainfall as a variable to compare the cities where riots
took place with cities where riots probably would have taken place
had it not rained. Few things can dampen a rioters spirit more than a
soaking rain, they learned. After two days of rioting in Miami in the
summer of 1968 were finally quelled by rain, they write, the Dade
County sheriff joked to The New York Times that he had ordered his
off-duty officers to pray for more rain.
The economists Edward Miguel, Shanker Satyanath and Ernest

Sergenti have written a paper that uses rainfall to explore the issue of
civil war in Africa. Twenty-nine of 43 countries in sub-Saharan Africa,
they note, experienced some kind of civil war during the 1980s or
1990s. The causes of any war are of course incredibly complex or
are they? The economists discovered that one of the most reliable
predictors of civil war is lack of rain. Using monthly rainfall data from
many different African countries (most of which, significantly, are
largely agricultural), they found that a shortage of rain in a given
growing season led inevitably to a short-term economic decline and
that short-term economic declines led all too easily to civil war. The
causal effect of a drought, they argue, was frighteningly strong: a 5-
percentage-point negative growth shock a drop in the economy,
that is increases the likelihood of civil war the following year by
nearly one-half.
Since the weather yields such interesting findings about the past, it
makes sense that economists are also tempted to use it to anticipate
the future. In their second paper on the potential effects of global
warming, Deschnes and Greenstone try to predict mortality rates in
the U.S. in the last quarter of the current century.
Unlike in their paper on agriculture, the news in this one isnt good.
They estimate, using one of the latest (and most dire) climatological
models, that the predicted rise in temperature will increase the death
rate for American men by 1.7 percent (about 21,000 extra fatalities
per year) and for American women by 0.4 percent (about 8,000
deaths a year). Most of these excess deaths, they write, will be caused
by hot weather that worsens cardiovascular and respiratory
conditions. These deaths will translate into an economic loss of
roughly $31 billion per year. Deschnes and Greenstone caution that
their paper is in a preliminary stage and hasnt yet been peer-
reviewed and that the increased mortality rate may well be offset by
such simple (if costly) measures as migration to the Northern states
a repopulation that, even a decade ago, might have seemed
unimaginable.
Their paper on agriculture also has some wrinkles. While arguing that
global warming would produce a net agricultural gain in the United
States, they specify which states would be the big winners and which
ones would be the big losers. Whats most intriguing is that winners
and losers lists are a true blend of red states and blue states: New
York, along with Georgia and South Dakota, are among the winners;
Nebraska and North Carolina would lose out, but the biggest loser of
all would be California. Which suggests that in this most toxic of
election seasons, when there seems not a single issue that can unite
blue and red staters (or at least the politicians thereof), global
warming could turn out to be just the thing to bring us all together.
Selling Soap
The Petri-Dish Screen Saver
Leon Bender is a 68-year-old urologist in Los Angeles. Last year,

during a South Seas cruise with his wife, Bender noticed something
interesting: passengers who went ashore werent allowed to reboard
the ship until they had some Purell squirted on their hands. The crew
even dispensed Purell to passengers lined up at the buffet tables. Was
it possible, Bender wondered, that a cruise ship was more diligent
about killing germs than his own hospital?
Cedars-Sinai Medical Center, where Bender has been practicing for 37

years, is in fact an excellent hospital. But even excellent hospitals
often pass along bacterial infections, thereby sickening or even killing
the very people they aim to heal. In its 2000 report To Err Is
Human, the Institute of Medicine estimated that anywhere from
44,000 to 98,000 Americans die each year because of hospital errors
more deaths than from either motor-vehicle crashes or breast
cancer and that one of the leading errors was the spread of bacterial
infections.
While it is now well established that germs cause illness, this wasnt
always known to be true. In 1847, the Hungarian physician Ignaz
Semmelweis was working in a Viennese maternity hospital with two
separate clinics. In one clinic, babies were delivered by physicians; in
the other, by midwives. The mortality rate in the doctors clinic was
nearly triple the rate in the midwives clinic. Why the huge
discrepancy? The doctors, it turned out, often came to deliveries
straight from the autopsy ward, promptly infecting mother and child
with whatever germs their most recent cadaver happened to carry.
Once Semmelweis had these doctors wash their hands with an
antiseptic solution, the mortality rate plummeted.
But Semmelweiss mandate, as crucial and obvious as it now seems,

has proved devilishly hard to enforce. A multitude of medical studies
have shown that hospital personnel wash or disinfect their hands in
fewer than half the instances they should. And doctors are the worst
offenders, more lax than either nurses or aides.
All of this was on Benders mind when he got home from his cruise.
As a former chief of staff at Cedars-Sinai, he felt inspired to help
improve his colleagues behavior. Just as important, the Joint
Commission on Accreditation of Healthcare Organizations would
soon be inspecting Cedars-Sinai, and it simply wouldnt do for a
world-class hospital to get failing marks because its doctors didnt
always wash their hands.

RELATED COVERAGE
It may seem a mystery why doctors, of all people, practice poor hand
hygiene. But as Bender huddled with the hospitals leadership, they
identified a number of reasons. For starters, doctors are very busy.
And a sink isnt always handy often it is situated far out of a
doctors work flow or is barricaded by equipment. Many hospitals,
including Cedars-Sinai, had already introduced alcohol-based
disinfectants like Purell as an alternative to regular hand-washing.
But even with Purell dispensers mounted on a wall, the Cedars-Sinai
doctors didnt always use them.
Photo
CreditIllustration by Paul Sahre and Loren Flaherty

There also seem to be psychological reasons for noncompliance. The
first is what might be called a perception deficit. In one Australian
medical study, doctors self-reported their hand-washing rate at 73
percent, whereas when these same doctors were observed, their actual
rate was a paltry 9 percent. The second psychological reason,
according to one Cedars-Sinai doctor, is arrogance. The ego can kick
in after you have been in practice a while, explains Paul Silka, an
emergency-department physician who is also the hospitals chief of
staff. You say: Hey, I couldnt be carrying the bad bugs. Its the other
hospital personnel. Furthermore, most of the doctors at Cedars-
Sinai are free agents who work for themselves, not for the hospital,
and many of them saw the looming Joint Commission review as a
nuisance. Their incentives, in other words, were not quite aligned
with the hospitals.
So the hospital needed to devise some kind of incentive scheme that

would increase compliance without alienating its doctors. In the
beginning, the administrators gently cajoled the doctors with e-mail,
faxes and posters. But none of that seemed to work. (The hospital had
enlisted a crew of nurses to surreptitiously report on the staffs hand-
washing.) Then we started a campaign that really took the word to
the physicians where they live, which is on the wards, Silka recalls.
And, most importantly, in the physicians parking lot, which in L.A.
is a big deal.
For the next six weeks, Silka and roughly a dozen other senior
personnel manned the parking-lot entrance, handing out bottles of
Purell to the arriving doctors. They started a Hand Hygiene Safety
Posse that roamed the wards and let it be known that this posse
preferred using carrots to sticks: rather than searching for doctors
who werent compliant, theyd try to catch a doctor who was
washing up, giving him a $10 Starbucks card as reward. You might
think that the highest earners in a hospital wouldnt much care about
a $10 incentive but none of them turned down the card, Silka
says.
When the nurse spies reported back the latest data, it was clear that
the hospitals efforts were working but not nearly enough.
Compliance had risen to about 80 percent from 65 percent, but the
Joint Commission required 90 percent compliance.
These results were delivered to the hospitals leadership by Rekha

Murthy, the hospitals epidemiologist, during a meeting of the Chief of
Staff Advisory Committee. The committees roughly 20 members,
mostly top doctors, were openly discouraged by Murthys report.
Then, after they finished their lunch, Murthy handed each of them an
agar plate a sterile petri dish loaded with a spongy layer of agar. I
would love to culture your hand, she told them.
They pressed their palms into the plates, and Murthy sent them to the
lab to be cultured and photographed. The resulting images, Silka says,
were disgusting and striking, with gobs of colonies of bacteria.
The administration then decided to harness the power of such a

disgusting image. One photograph was made into a screen saver that
haunted every computer in Cedars-Sinai. Whatever reasons the
doctors may have had for not complying in the past, they vanished in
the face of such vivid evidence. With people who have been in
practice 25 or 30 or 40 years, its hard to change their behavior, Leon
Bender says. But when you present them with good data, they change
their behavior very rapidly. Some forms of data, of course, are more
compelling than others, and in this case an image was worth 1,000
statistical tables. Hand-hygiene compliance shot up to nearly 100
percent and, according to the hospital, it has pretty much remained
there ever since.
Cedars-Sinais clever application of incentives is certainly encouraging

to anyone who opposes the wanton proliferation of bacterial
infections. But it also highlights how much effort can be required to
solve a simple problem and, in this case, the problem is but one of
many. Craig Feied, a physician and technologist in Washington who is
designing a federally financed hospital of the future, says that hand
hygiene, while important, will never be sufficient to stop the spread of
bacteria. Thats why he is working with a technology company that
infuses hospital equipment with silver ion particles, which serve as an
antimicrobial shield. Microbes can thrive on just about any surface in
a hospital room, Feied notes, citing an old National Institutes of
Health campaign to promote hand-washing in pediatric wards. The
campaign used a stuffed teddy bear, called T. Bear, as a promotional
giveaway. Kids and doctors alike apparently loved T. Bear but they
werent the only ones. When, after a week, a few dozen T. Bears were
pulled from the wards to be cultured, every one of them was found to
have acquired a host of new friends: Staphylococcus aureus, E. coli,
Pseudomonas, Klebsiella.. . .
Flesh Trade
Weighing the Repugnance Factor
How's this for a repugnant situation? Take someone you love, perhaps
your spouse or your sibling, and find a stranger who will accept a
really big bet that your loved one will die prematurely and if indeed
that happens, you pocket a few million dollars.
This, of course, is how life insurance works. And most Americans

don't find this idea repugnant at all. They used to, however. Until the
mid-19th century, life insurance was considered "a profanation," as
the sociologist Viviana Zelizer has written, "which transformed the
sacred event of death into a vulgar commodity."
Alvin Roth, a Harvard economist who studies the design of markets,

has done a lot of thinking about repugnance. On some issues, he
notes, repugnance will recede, as with life insurance or, even more
momentously, the practice of charging interest on loans. In other
cases, the reverse happens: a once-accepted behavior like
slaveholding comes to be seen as repugnant.
One case of repugnance is far from settled: the dispute over how
human organs for transplantation should be allocated and,
perhaps, even sold. If you happen to have a failing heart or liver or
kidneys, you will almost certainly die without a transplant, but if you
aren't lucky enough to get an organ through an official registry, you
can't legally purchase one at any price. So instead of a free market in
organs, we have a volunteer market. Some people agree to give up
their usable organs once they die. In the case of a living donor,
someone sacrifices a kidney or a portion of a liver to a recipient, most
likely a family member.

RELATED COVERAGE
In the space of just a few decades, transplant surgery has become safe
and reliable (to say nothing of miraculous). But success breeds
demand: as more patients get new organs, more patients want them.
In 2005, more than 16,000 kidney transplants were performed in the
U.S., an increase of 45 percent over 10 years. But during that time, the
number of people on a kidney waiting list rose by 119 percent. More
than 3,500 people now die each year waiting for a kidney transplant.
To an economist, this is a basic supply-and-demand gap with tragic
consequences. So what can be done to increase the supply of organs?
A big problem is that would-be suppliers are not given very strong
incentives to step forward. In much of Europe, the choice is made for
them: instead of "opting in" to donate, the default assumption is that
your usable organs will be harvested upon your death unless your
family "opts out." But Europe, too, still has a sizable organ shortage,
in part because traffic fatalities which tend to produce desirable
organs for harvest are on a downward trend in Western countries.
Photo

If it's hard to get people to give up their organs upon death, consider
how much harder it is to persuade a living person to donate a kidney.
(From a medical perspective, a kidney from a living donor is far more
valuable than a cadaver kidney.) Even though most people can live
safely on one kidney, there is still a price to be paid in discomfort,
risk, fear and lost wages. But the United States, like pretty much every
other country in the world, forbids a donor to collect on that price, or
any other.
It is hard to find an economist who agrees with this policy. Gary

Becker and Julio Jorge Elias argued in a recent paper that "monetary
incentives would increase the supply of organs for transplant
sufficiently to eliminate the very large queues in organ markets, and
the suffering and deaths of many of those waiting, without increasing
the total cost of transplant surgery by more than 12 percent."
Some noneconomists may well find this reasoning repugnant. There

are many reasons, after all, for banning the sale of organs. Some
people consider it immoral to commodify body parts (although it is
now commonplace to not only sell sperm and eggs but also to rent a
womb). Others fear that most organ sellers would be poor while most
buyers would be rich; or that someone might be pressured into selling
a kidney without fully understanding the risks.
But why, Becker and Elias ask, should poor people "be deprived of
revenue that could be highly useful to them"? Even more compelling
is the fact that a poor person is just as likely as a wealthy person (if
not more so) to need a new kidney and, with no legal market for
organs, is just as likely to die while waiting on a list.
Alvin Roth, even though he is an economist, is smart enough to realize

that repugnance will keep Americans from embracing a true market
for organs anytime soon. So, along with several other scholars and
medical personnel, he has helped design a clever alternative, the New
England Program for Kidney Exchange. Imagine that you have a wife
who is dying of renal failure, and that you would give her one of your
kidneys, but you are not a biological match. Now imagine that another
couple is in the same bind. The kidney exchange locates and matches
the couples: you donate your kidney to the stranger's wife, while the
stranger gives his kidney to your wife; the operations are performed
simultaneously to make sure no one backs out. Although this system
has yielded only a couple dozen transplants so far, it illustrates an
economist's understanding of incentives: if you can't get someone to
give an organ out of altruism, and you can't pay him either, what do
you do? Find two parties who are desperate to align their incentives.
Otherwise, who in his right mind would step forward to donate a

kidney to a stranger? In fact, we recently spoke to one such potential
donor who asked to remain anonymous. Donor is married, with four
children and a precarious financial situation. Because Donor had a
sibling who nearly needed an organ transplant, the idea got into
Donor's head to perhaps sell a kidney to a stranger. Through a donor
Web site, Donor met a potential recipient, whom we'll call Recipient.
It wasn't until the process was well under way that Donor learned it
was illegal to be paid. In the end, however, Donor's moral mission
overrode the financial need, and Donor decided to go ahead with the
transplant.
Donor has undergone extensive testing at the hospital where

Recipient will have the transplant. Both Donor and Recipient have
had to lie repeatedly to the doctors, pretending they are old friends.
"If they find out you met on the Internet," Donor explains, "they
assume it's for money, and they'll call off the operation."
If all goes well, the transplant may happen soon. Consider the parties
who stand to profit from this transaction: Recipient, certainly, as well
as the transplant surgeons, the nurses, the hospital, the drug
companies. Everyone will be paid in some form except for Donor,
who not only isn't being paid but, in return for carrying out a deeply
altruistic act, also has to pay the additional price of lying about it.
Surely there are some people, and not just economists, who would
find this situation well, repugnant.
A Star Is Made
The Birth-Month Soccer Anomaly
If you were to examine the birth certificates of every soccer player in

next month's World Cup tournament, you would most likely find a
noteworthy quirk: elite soccer players are more likely to have been
born in the earlier months of the year than in the later months. If you
then examined the European national youth teams that feed the
World Cup and professional ranks, you would find this quirk to be
even more pronounced. On recent English teams, for instance, half of
the elite teenage soccer players were born in January, February or
March, with the other half spread out over the remaining 9 months.
In Germany, 52 elite youth players were born in the first three months
of the year, with just 4 players born in the last three.
What might account for this anomaly? Here are a few guesses: a)
certain astrological signs confer superior soccer skills; b) winter-born
babies tend to have higher oxygen capacity, which increases soccer
stamina; c) soccer-mad parents are more likely to conceive children in
springtime, at the annual peak of soccer mania; d) none of the above.
Anders Ericsson, a 58-year-old psychology professor at Florida State

University, says he believes strongly in "none of the above." He is the
ringleader of what might be called the Expert Performance
Movement, a loose coalition of scholars trying to answer an important
and seemingly primordial question: When someone is very good at a
given thing, what is it that actually makes him good?
Ericsson, who grew up in Sweden, studied nuclear engineering until

he realized he would have more opportunity to conduct his own
research if he switched to psychology. His first experiment, nearly 30
years ago, involved memory: training a person to hear and then
repeat a random series of numbers. "With the first subject, after about
20 hours of training, his digit span had risen from 7 to 20," Ericsson
recalls. "He kept improving, and after about 200 hours of training he
had risen to over 80 numbers."

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This success, coupled with later research showing that memory itself
is not genetically determined, led Ericsson to conclude that the act of
memorizing is more of a cognitive exercise than an intuitive one. In
other words, whatever innate differences two people may exhibit in
their abilities to memorize, those differences are swamped by how
well each person "encodes" the information. And the best way to learn
how to encode information meaningfully, Ericsson determined, was a
process known as deliberate practice.
Deliberate practice entails more than simply repeating a task

playing a C-minor scale 100 times, for instance, or hitting tennis
serves until your shoulder pops out of its socket. Rather, it involves
setting specific goals, obtaining immediate feedback and
concentrating as much on technique as on outcome.
Ericsson and his colleagues have thus taken to studying expert

performers in a wide range of pursuits, including soccer, golf, surgery,
piano playing, Scrabble, writing, chess, software design, stock picking
and darts. They gather all the data they can, not just performance
statistics and biographical details but also the results of their own
laboratory experiments with high achievers.
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Their work, compiled in the "Cambridge Handbook of Expertise and
Expert Performance," a 900-page academic book that will be
published next month, makes a rather startling assertion: the trait we
commonly call talent is highly overrated. Or, put another way, expert
performers whether in memory or surgery, ballet or computer
programming are nearly always made, not born. And yes, practice
does make perfect. These may be the sort of clichs that parents are
fond of whispering to their children. But these particular clichs just
happen to be true.
Ericsson's research suggests a third clich as well: when it comes to
choosing a life path, you should do what you love because if you
don't love it, you are unlikely to work hard enough to get very good.
Most people naturally don't like to do things they aren't "good" at. So
they often give up, telling themselves they simply don't possess the
talent for math or skiing or the violin. But what they really lack is the
desire to be good and to undertake the deliberate practice that would
make them better.
"I think the most general claim here," Ericsson says of his work, "is
that a lot of people believe there are some inherent limits they were
born with. But there is surprisingly little hard evidence that anyone
could attain any kind of exceptional performance without spending a
lot of time perfecting it." This is not to say that all people have equal
potential. Michael Jordan, even if he hadn't spent countless hours in
the gym, would still have been a better basketball player than most of
us. But without those hours in the gym, he would never have become
the player he was.
Ericsson's conclusions, if accurate, would seem to have broad

applications. Students should be taught to follow their interests
earlier in their schooling, the better to build up their skills and acquire
meaningful feedback. Senior citizens should be encouraged to acquire
new skills, especially those thought to require "talents" they
previously believed they didn't possess.
And it would probably pay to rethink a great deal of medical training.

Ericsson has noted that most doctors actually perform worse the
longer they are out of medical school. Surgeons, however, are an
exception. That's because they are constantly exposed to two key
elements of deliberate practice: immediate feedback and specific goal-
setting.
The same is not true for, say, a mammographer. When a doctor reads
a mammogram, she doesn't know for certain if there is breast cancer
or not. She will be able to know only weeks later, from a biopsy, or
years later, when no cancer develops. Without meaningful feedback, a
doctor's ability actually deteriorates over time. Ericsson suggests a
new mode of training. "Imagine a situation where a doctor could
diagnose mammograms from old cases and immediately get feedback
of the correct diagnosis for each case," he says. "Working in such a
learning environment, a doctor might see more different cancers in
one day than in a couple of years of normal practice."
If nothing else, the insights of Ericsson and his Expert Performance
compatriots can explain the riddle of why so many elite soccer players
are born early in the year.
Since youth sports are organized by age bracket, teams inevitably

have a cutoff birth date. In the European youth soccer leagues, the
cutoff date is Dec. 31. So when a coach is assessing two players in the
same age bracket, one who happened to have been born in January
and the other in December, the player born in January is likely to be
bigger, stronger, more mature. Guess which player the coach is more
likely to pick? He may be mistaking maturity for ability, but he is
making his selection nonetheless. And once chosen, those January-
born players are the ones who, year after year, receive the training,
the deliberate practice and the feedback to say nothing of the
accompanying self-esteem that will turn them into elites.
This may be bad news if you are a rabid soccer mom or dad whose
child was born in the wrong month. But keep practicing: a child
conceived on this Sunday in early May would probably be born by
next February, giving you a considerably better chance of watching
the 2030 World Cup from the family section.
Filling in the Tax Gap
Mr. Szilagyi's Billion-Dollar Idea
This is the time of year when American citizens inevitably think about
the Internal Revenue Service and, also inevitably, about how deeply
they hate it. But most people who hate the I.R.S. probably do so for
the wrong reasons. They think it is a tough and cruel agency, but in
fact it is not nearly as tough and cruel as it should be.
The first thing to remember is that the I.R.S. doesn't write the tax
code. The agency is quick to point its finger at the true villain: "In the
United States, the Congress passes tax laws and requires taxpayers to
comply," its mission statement says. "The I.R.S. role is to help the
large majority of compliant taxpayers with the tax law, while ensuring
that the minority who are unwilling to comply pay their fair share."
So the I.R.S. is like a street cop or, more precisely, the biggest fleet of
street cops in the world, who are asked to enforce laws written by a
few hundred people on behalf of a few hundred million people, a great
many of whom find these laws too complex, too expensive and unfair.
And yet most Americans say they are proud to pay their taxes. In an
independent poll conducted last year for the I.R.S. Oversight Board,
96 percent of the respondents agreed with the statement "It is every
American's civic duty to pay their fair share of taxes," while 93
percent agreed that everyone "who cheats on their taxes should be
held accountable." On the other hand, when asked what influences
their decision to report and pay taxes honestly, 62 percent answered
"fear of an audit," while 68 percent said it was the fact that their
income was already being reported to the I.R.S. by third parties. For
all the civic duty floating around, it would seem that most compliance
is determined by good old-fashioned incentives.

So which of these incentives work and which do not? To find out, the
I.R.S. conducted the National Research Program, a three-year study
during which 46,000 randomly selected 2001 tax returns were
intensively reviewed. (The I.R.S. doesn't specify what these 46,000
people were subjected to, but it may well have been the kind of
inquisition that has earned the agency its horrid reputation.) Using
this sample, the study found a tax gap -- the difference between taxes
owed and taxes actually paid -- of $345 billion, or nearly one-fifth of
all taxes collected by the I.R.S. This sum happens to be just a few
billion dollars less than the projected federal budget deficit for 2007;
it also amounts to more than $1,000 worth of cheating by every man,
woman and child in the U.S.
But most people aren't cheating. And when you take a look at who
does cheat and who doesn't, it becomes pretty clear just why people
pay their taxes at all. The key statistic in the I.R.S.'s study is called the
Net Misreporting Percentage. It measures the amount that was
misreported on every major line item on those 46,000 returns. In the
"wages, salaries, tips" category, for instance, Americans are
underreporting only 1 percent of their actual income. Meanwhile, in
the "nonfarm proprietor income" category -- think of self-employed
workers like a restaurateur or the boss of a small construction crew --
57 percent of the income goes unreported. That's $68 billion in
unpaid taxes right there.
Why such a huge difference between the wage earner and a

restaurateur? Simple: The only person reporting the restaurateur's
income to the I.R.S. is the restaurateur himself; for the wage earner,
his employer is generating a W2 to let the I.R.S. know exactly how
much he has been paid. And the wage earner's taxes are automatically
withheld from his every check, while the restaurateur has all year to
decide if, and how much, he will pay.
Does this mean that the average self-employed worker is less honest
than the average wage earner? Not necessarily. It's just that he has
much more incentive to cheat. He knows that the only chance the
I.R.S. has of learning his true income and expenditures is to audit
him. And all he has to do is look at the I.R.S.'s infinitesimal audit rate
-- last year, the agency conducted face-to-face audits on just 0.19
percent of all individual taxpayers -- to feel pretty confident to go
ahead and cheat.
So why do people really pay their taxes: because it is the right thing to
do, or because they fear getting caught if they don't? It sure seems to
be the latter. A combination of good technology (employer reporting
and withholding) and poor logic (most people who don't cheat
radically overestimate their chances of being audited) makes the
system work. And while it sounds bad to hear that Americans
underpay their taxes by nearly one-fifth, the tax economist Joel
Slemrod estimates that the U.S. is easily within the upper tier of
worldwide compliance rates.
Still, unless you are personally cheating by one-fifth or more, you
should be mad at the I.R.S. -- not because it's too vigilant, but because
it's not nearly vigilant enough. Why should you pay your fair share
when the agency lets a few hundred billion dollars of other people's
money go uncollected every year?
The I.R.S. itself would love to change this dynamic. In the past few
years, it has increased significantly its enforcement revenue and its
audit rate, despite a budget that is only fractionally larger. A main
task of any I.R.S. commissioner (the current one is Mark Everson) is
to beg Congress and the White House for resources. For all the
obvious appeal of having the I.R.S. collect every dollar owed to the
government, it is just as obviously unappealing for most politicians to
advocate a more vigorous I.R.S. Michael Dukakis tried this during his
1988 presidential campaign, and -- well, it didn't work.
Left to enforce a tax code no one likes upon a public that knows it can
practically cheat at will, the I.R.S. does its best to fiddle around the
edges. Once in a while, it hits pay dirt.
In the early 1980's, an I.R.S. research officer in Washington named

John Szilagyi had seen enough random audits to know that some
taxpayers were incorrectly claiming dependents for the sake of an
exemption. Sometimes it was a genuine mistake (a divorced wife and
husband making duplicate claims on their children), and sometimes
the claims were comically fraudulent (Szilagyi recalls at least one
dependent's name listed as Fluffy, who was quite obviously a pet
rather than a child).
Szilagyi decided that the most efficient way to clean up this mess was
to simply require taxpayers to list their children's Social Security
numbers. "Initially, there was a lot of resistance to the idea," says
Szilagyi, now 66 and retired to Florida. "The answer I got was that it
was too much like '1984."' The idea never made its way out of the
agency.
A few years later, however, with Congress clamoring for more tax
revenue, Szilagyi's idea was dug up, rushed forward and put into law
for tax year 1986. When the returns started coming in the following
April, Szilagyi recalls, he and his bosses were shocked: seven million
dependents had suddenly vanished from the tax rolls, some
incalculable combination of real pets and phantom children. Szilagyi's
clever twist generated nearly $3 billion in revenues in a single year.
Szilagyi's immediate bosses felt he should get some kind of reward for
his idea, but their superiors weren't convinced. So Szilagyi called his
congressman, whogot the reward process back on track. Finally, five
years after his brainstorm became the law, Szilagyi, who earned about
$80,000 annually at the time, was given a check for $25,000. By this
point, his idea had generated roughly $14 billion.
Which suggests at least one legitimate reason to dislike the I.R.S.: if

the agency hadn't been so stingy with Szilagyi's reward back then, it
probably would have attracted a lot more of the anti-cheating wizards
it really needs today.
Endangered Species
The Boston-Minneapolis Hypothesis
It is hard to think of an occupation that garners less goodwill these

days than the real-estate agent. More often than not, agents are
portrayed as hustlers or sharks, unimaginative opportunists who, for
not all that much effort, pocket a significant chunk of the sale price of
your home. A great many of these agents and brokers, more than 1.2
million, belong to the National Association of Realtors, which the
Department of Justice accused in a recent lawsuit of behaving like a
cross between a cartel and a mafia, hoarding access to home-sale
databases and harassing competitors who dared to offer discounted
commissions.
Even if you believe all these terrible things about real-estate agents,
however, you should try to find in your heart a bit of sympathy for
them. There are two reasons for this.
To examine the first reason, ask this question: Who has prospered
during the recent real-estate boom? Home sellers, to be sure, along
with developers, mortgage brokers -- and also, you would assume,
your average real-estate agent. These agents have rung up millions of
sales while home prices have been doubling and even tripling. Since
an agent's commission is usually based on a fixed percentage of the
sale price -- typically 5 or 6 percent, of which about half goes to the
listing agent and half to the buyer's agent -- agents' fees have climbed
along with home prices, even though they probably don't have to work
any harder to sell an $800,000 house than they do a $200,000
house.
A listing agent really only performs four main functions: setting the
price of your home, finding potential buyers, prepping and showing
them the house and handling the negotiations and contracts. Just for
fun, let's put a value on each of these functions. Setting a home's
asking price requires a few hours of work at most, studying the house
and the data on comparable sales. Showing the typical home might
take 20 or 30 hours, with negotiations and contracts taking maybe
four hours. Attracting potential buyers is of course the trickiest task --
which is why, as the Justice Department alleges, Realtors have tried to
block access to the for-sale databases. But it's now easy to find
independent or discount agents who will list your house on the
Multiple Listing Service for a fee of about $750.
So in sum, we are talking about perhaps 40 hours of work. Let's be
generous and say that's worth $100 an hour. Add another $750 to list
the home. That's a total of $4,750, which makes the 6 percent
commission that you would pay on the sale of a $500,000 house --
$15,000 each to your agent and the buyer's agent -- look pretty steep.
It would seem obvious that being an agent during a real-estate boom
is a great way to earn a good living.
As it turns out, however, most agents don't make very much money
during a boom, because of one simple fact: the boom attracts way too
many of them. Over the past 10 years, membership in the N.A.R. has
risen by more than 75 percent. And why not? Compared with most
professions, becoming a real-estate agent is quick, cheap and
relatively painless. In economics, this phenomenon is known as free
entry.
In a 2003 paper titled "Can Free Entry Be Inefficient?" Chang-Tai

Hsieh and Enrico Moretti, economists at the University of California,
Berkeley, examined the income of real-estate agents in various
markets under various conditions. Relying on data from the Census of
Population and Housing in 1980 and 1990, Hsieh and Moretti
compared home sales in 282 metropolitan areas. But their story can
be told using just a pair of cities: Boston and Minneapolis, which are
similar in size and demographics -- but quite different in the price of
their real estate.
In 1990, a typical house in Boston cost roughly twice as much as a

typical house in Minneapolis. Since commission rates were fixed, an
agent would earn twice as much selling a house in Boston. But the
Boston market, with so much more commission money up for grabs,
attracted many more agents than Minneapolis did -- even though it
turned out that more homes were actually being sold in Minneapolis.
The result? The typical Minneapolis agent sold twice as many homes
(6.6 per year) as the typical Boston agent (3.3 per year) -- which left
the Boston agent, despite the higher prices in her market, no better off
than her Minneapolis counterpart. What should be a competitive
marketplace -- which would inevitably lead to lower prices -- is not,
since the price of the agents' service is essentially fixed in place.
The N.A.R.'s own figures show the same dynamic at work today,
nationwide. From 2002 to 2004, during one of the hottest real-estate
markets in American history, the median income for Realtors actually
fell -- to $49,300 from $52,200. This is not to say that some agents
haven't become rich. As in most sales professions, whether the
product is diamond rings or crack cocaine, the people at the top of the
pyramid make an awful lot more money than those down below. It's
just that the base of the real-estate agent pyramid grows significantly
during a boom.
And because hungry new Realtors are discouraged from undercutting

their competitors by lowering their commission, they compete instead
by frantically trying to obtain new listings. This would explain why
your mailbox is jammed with postcards from Realtors exhorting you
to sell. Most real-estate agents seem to spend 95 percent of their
energy chasing clients (for which they are paid nothing) and 5 percent
actually serving them (for which they are paid way too much).
The second reason to feel bad for real-estate agents is even more dire:
their very profession is about to join the endangered-species list.
Think back for a moment to 1999. Travel agents still roamed the earth
in vast numbers. So did stockbrokers. But their business models were
being blown apart, largely by the Internet. The new market for do-it-
yourself online securities trading lowered fees so drastically that a
full-price stockbroker could simply no longer earn a living. Travel
agents were shoved aside once the Internet gave customers the ability
to book their own trips -- and when, perhaps more damagingly, the
airlines decided to stop paying the travel agents' commissions.
The Internet is a natural repository for the sort of data that drive the
real-estate market. New sites like zillow.com let anyone try to figure
out (if imperfectly) what his home is worth; sites like craigslist.org
allow buyers and sellers to easily find each other. As those services
and ones like them become more popular, it is hard to imagine that
the market will allow Realtors to maintain their hefty commissions.
There will always be some home sellers who prefer full-service, full-
fee agents, and a handful of these high-end agents will undoubtedly
thrive (just as some full-service travel agents and stockbrokers still
thrive, except they are now called "travel counselors" and "financial
planning specialists," respectively). But more and more home sellers,
armed with data from real-estate Web sites and facing a variety of
pricing options, will surely choose another route.
In addition to discount and flat-fee brokers, one likely successor is the
fee-for-service broker. Cary and Barbara Chubin, a married couple
who just relocated from Chicago to Oakland, started up this kind of
business in Chicago. They charged $750 to list a home on the Multiple
Listing Service, $50 an hour for showing the home and $250 for
negotiations and closing. Younger home sellers flocked to the
Chubins' pricing model; but older customers, Cary Chubin recalls,
were leery. Chubin understands. "People can't believe it could be so
much cheaper than they're used to paying," he says. "Plus, a home is
the most valuable asset most people have, and you're afraid to death
of making a mistake."
Fear may be a great motivator for maintaining the status quo, but the
Chubins say they believe they have found an even better one: money.
That's how Barbara Chubin plays the game in her advertising: "Do
you want to go to the Caribbean? Or would you rather give the money
to your real-estate agent?"
How Many Lives Did Dale Earnhardt Save?
Calculating a Driver's Risk
Five years ago this weekend, Dale Earnhardt crashed into a wall
during the final lap of the Daytona 500 and was instantly killed. One
of the most successful, beloved and intimidating drivers in Nascar
history, Earnhardt is still actively mourned. (If you watch today's
Daytona 500, the first and most prominent race of the Nascar season,
you will surely see his No. 3 everywhere.) Earnhardt's death was to
Nascar as 9/11 was to the federal government: a wake-up call leading
to a radical overhaul of safety measures. "There were three or four bad
accidents in a row there over two or three years," says Matt Kenseth,
an elite Nascar driver. "Nascar was always working hard on safety, but
that" -- Earnhardt's death -- "really sped things up."
Driving a race car is an obviously hazardous pursuit. When Earnhardt

died, he was the seventh driver within Nascar's three major divisions
-- the Craftsman Truck Series, the Busch Series and the premier
circuit now known as the Nextel Cup Series -- to die within a period of
seven years.
And how many drivers have been killed since his death in 2001?
Zero. In more than six million miles of racing -- and many, many
miles in practice and qualifying laps, which are plenty dangerous --
not a single driver in Nascar's three top divisions has died.
On U.S. roads, meanwhile, roughly 185,000 drivers, passengers and

motorcyclists have been killed during this same time frame. Those
185,000 deaths, though, came over the course of nearly 15 trillion
miles driven. This translates into one fatality for every 81 million
miles driven. Although traffic accidents are the leading cause of death
for Americans from ages 3 to 33, this would seem to be a pretty low
death rate (especially since it includes motorcycles, which are far
more dangerous than cars or trucks). How long might it take one
person to drive 81 million miles? Let's say that for a solid year you did
nothing but drive, 24 hours a day, at 60 miles per hour. In one year,
you'd cover 525,600 miles; to reach 81 million miles, you'd have to
drive around the clock for 154 years. In other words, a lot of people
die on U.S. roads each year not because driving is so dangerous, but
because an awful lot of people are driving an awful lot of miles.
So Nascar's record of zero deaths in five years over six million miles is
perhaps not as remarkable as it first sounded. Still, driving a race car
would seem to be substantially more dangerous than taking a trip to
the supermarket. What has Nascar done to produce its zero-fatality
record?
It's a long list. Well before Earnhardt was killed, each driver was
already wearing a helmet, fireproof suit and shoes and a five-point
safety harness. Months after Earnhardt's death, Nascar began
requiring the use of a head-and-neck restraint that is tethered to a
driver's helmet and prevents his head from flying forward or sideways
in a crash. (Like many race-car drivers who are killed, Earnhardt
suffered a fracture to the base of the skull.) It erected safer walls on its
race tracks. And it began to zealously collect crash data. This Incident
Database (which Nascar politely declined to let us examine) is gleaned
from two main sources: a black box now mounted on every vehicle
and the work of a new Field Investigation unit. These field
investigators meticulously take key measurements on every car before
every race, and then if a car is involved in a crash, they retake those
measurements.
"In the past, a car would be in an accident, the driver would have no
injuries and the team would load up the car and go home," says Gary
Nelson, who runs Nascar's research and development center. "But
now they measure every car in certain areas, and we make a log of
that. Like the width of the seat -- it seems simple, the width of the
headrest from left to right. But in an accident, those things can bend,
and the amount they bend can help us understand the energy
involved. When we began, we thought our seats were adequately
strong, but we found these things to be bending more than we
thought. So we've come back since and rewritten the regulations."
Although it is wildly reductive to put it this way, a Nascar driver has

two main goals: to win a race and to not be killed. Nascar's recent
safety measures seem to have considerably reduced the likelihood of
being killed. So could it be that drivers are now willing to be more
reckless? When crashing is made less costly, an economist would fully
expect drivers to be crashing like crazy; could it be that Nascar's safety
measures have led to fewer deaths but more crashes?
A quick look at the data seems to suggest so. In last year's Nextel Cup
races, there were 345 cars involved in crashes, an all-time high. But,
as Matt Kenseth points out, the two cup races held during 2005 at
Lowe's Motor Speedway near Charlotte, N.C., were unusually brutal --
the track had a new surface that caused numerous flat tires -- and
may have aberrationally affected the crash count. "In Charlotte, pretty
much everybody wrecked in both races," he says. "It was the fault of
the track and the tires -- but if you take those races out of it, crashes
are probably about even." And there were actually fewer crashes in
2004 than there were in 2003. While the number of overall crashes
are up a bit since Earnhardt's death (Nascar will not release annual
crash counts, but one official did confirm this trend), they haven't
increased nearly as much as an economist might have predicted based
on how Nascar's safety measures would seem to have shifted a driver's
incentives.
Maybe that's because there are other, perhaps stronger, incentives at

play. The first is that Nascar has increased its penalties for reckless
driving, not only fining drivers but also subtracting points in their
race for the cup championship. The other lies in how the cup
championship itself has been restructured. Two years ago, Nascar
gave its 36-race season a playoff format. In order to qualify for the
playoffs -- and have a chance at winning the $6 million-plus cup
championship -- a driver must be among the points leaders after the
first 26 races of the season. While a couple of 20th-place finishes
during those first 26 races won't necessary ruin your championship
hopes (each race fields a slate of 43 cars), a few bad crashes might.
So Nascar has reduced a danger incentive but imposed a financial

incentive, thus maintaining the delicate and masterful balance it has
cultivated: it has enough crashes to satisfy its fans but not too many to
destroy the sport -- or its drivers. (Nascar fans love crashes the way
hockey fans love fights; when you watch the Speed Channel's edited
replays of Nascar races, the plot is always the same: green flag, crash,
crash, crash, crash, crash, checkered flag.)
And here lies the most startling statistic concerning Nascar and driver
safety. In the past five years, more than 3,000 vehicles have crashed
in Nascar's three top divisions, with zero fatalities. How does this
compare with crashes on American highways? For interstate travel,
there are 5.2 driver deaths per 1,000 crashes. At this rate, it would
seem likely that those 3,000 Nascar crashes would have produced at
least 15 deaths -- and yet there have been none. To be sure, there are
significant differences between Interstate driving and Nascar driving.
A driver on the Interstate has to contend with poor weather, drunken
drivers and cars coming at him in the opposite direction. On the other
hand, a driver in the Daytona 500 is often traveling at 180 miles per
hour in bumper-to-bumper traffic.
With more than 37,000 Americans dying in traffic accidents each

year, it might be tempting to impose some of Nascar's safety
regulations on the average driver. But considering how relatively safe
it is to drive in this country, the added costs, measured in both dollars
and comfort, would be steep. You might be willing to wear a five-point
safety harness instead of the typical three-point lap-and-shoulder
belt, and you would almost certainly be safer if you did. But are you
ready to put on a helmet and fireproof suit every time you drive to the
supermarket?
Dissecting the Line
If you are a bookie, legal or otherwise, today is a signal day. People
who would never think of wagering on a regular National Football
League game suddenly become desperate to bet the Super Bowl.
People who do bet the N.F.L. every week (there are millions upon
millions of them) can hardly stand by and watch the tourists have all
the fun. This makes for a day in which billions of dollars change hands
-- as much on this single game as is bet on a full slate of games during
an entire month of the regular season.
Which means that if a bookie loses big today, it could ruin his year.
And, yes, bookies can lose. In a Las Vegas casino, games like roulette
and blackjack match a player against the house in a contest whose
odds are engineered in the house's favor. But in the casino's sports
book, things are different. The house's bookmaker sets a price in the
form of a point spread -- the Denver Broncos to win by at least 7
points, for instance. A bettor is then free to take either side. He can
bet the Broncos minus 7 points (he'll win this bet if the Broncos win
the game by more than 7 points), or he can bet the Broncos' opponent
plus 7 points (he'll win if the Broncos lose outright or win by fewer
than 7 points; if the Broncos win by 7 exactly, it's a "push," or tie). For
a bookie, offering these options creates risk. In financial markets, the
primary role of the market maker is simply to match buyers with
sellers; but in gambling, the market maker sets the price and sells the
shares. To win, the bookie must consistently outsmart his customers.
As it happens, there is one betting strategy that will routinely beat a

bookie, and you don't even have to be smart to use it. One of the most
undervalued N.F.L. bets is the home underdog -- a team favored to
lose but playing in its home stadium. If you had bet $5,000 on the
home underdog in every N.F.L. game over the past two decades, you
would be up about $150,000 by now (a winning rate of roughly 53
percent). This fact has led some academics to conclude that
bookmakers simply aren't very smart. If an academic researcher can
find this loophole, shouldn't a professional bookie be able to?
But the fact is most bookies are doing just fine. So could it be that
bookies have a good reason to allow that loophole to dangle? Could it
be that a seemingly dumb bookie is actually dumb like a fox?

To find out, we visited Chuck Esposito, a genial, quick-witted and
thoroughly sports-fixated man who runs the race and sports book at
Caesars Palace in Las Vegas. Esposito, 43, is a rare breed: a legal
bookmaker. The money bet on sports at Caesars and other Nevada
casinos is meager compared with the wagers made through illegal
bookies and quasi-legal Internet casinos. (Nevada, the only state that
allows wide-scale sports betting, takes in perhaps 1 percent of the
total United States sports-betting handle.) But with legality comes
some measure of transparency, which makes the Caesars bookmaking
operation worth studying. We saw Esposito on New Year's Day, the
final Sunday of the 2005-6 regular N.F.L. season.
The lounge where bettors congregate at Caesars is vast and thriving;

six jumbo TV screens tower above the betting counter. Tucked behind
all this is Esposito's windowless office, decked with sports
memorabilia from his native Chicago. He is monitoring today's games
on his own TV sets, seven small and aging models. Without checking
his computer, Esposito knows full well which teams need to win today
for Caesars to make money. How do things look so far? "As you can
see," he says, grinning, "I'm not under my desk, and I haven't had to
use the defibrillator today."
The most certain way for a bookmaker to turn a profit is to balance his
book -- that is, to set a point spread that produces an equal number of
dollars wagered on both sides of the line. Since only losers pay the
house a 10 percent fee (known as the vigorish, or vig) on top of
wagers, a balanced book guarantees the house a 5 percent gain. The
conventional wisdom holds that bookmakers set point spreads to
achieve this balance. "It's a myth when they say that every game is
balanced," Esposito says. "If we could do that on every game, we
would win every game, but it's impossible to do. The point spread is
the equalizer, but you still can't talk the public into betting one side or
the other."
The reason the public can't be talked into betting a particular side, at
least not too often, is that the public has biases. For every bettor
smart enough to stick to home underdogs, there are 5 or 10 bettors
who systematically prefer favorites or who underestimate the impact
of home-field advantage. (It isn't clear why bettors prefer favorites,
but such a tendency characterizes most betting against a spread.)
Then there are the bettors who disproportionately take the "over" in
an over-under bet (in which a bettor wagers on the total number of
points scored in a game), presumably because, when it's time to watch
the game you've bet on, it's a lot more fun to root for points to be
scored than for points to not be scored.
So does Esposito exploit those biases to increase his winnings? "But I

don't know when the public's wrong, I really don't," he says. "That's a
myth, too. I hear that all the time: 'You know who's going to win.' I
wish I did."
In determining where to set the opening line, and when to adjust it,
Esposito works hard to read public sentiment. One good clue is when
a team's jersey starts to spike in popularity among Caesars customers.
(This season it was the Cincinnati Bengals and the Chicago Bears.) He
notes which teams, despite their success, fail to become "public"
teams. (The Seattle Seahawks and the Carolina Panthers.) But the
most valuable tool is what Esposito calls "booking to faces" -- that is,
monitoring the betting counter to note which bettors are placing
which bets. "If someone comes in, his rich uncle died and left a
gazillion dollars, and he wants to bet $100,000 on the line, we
probably won't change the line," he says. "But if we get a $5,000 bet
from a handicapper we know to be really smart, we may well move it."
By Esposito's estimate, about 20 percent of the money bet on football

comes from sophisticated bettors -- the "sharp guys" -- with the
remainder
coming from a group known industrywide as the squares. The trick is

to set a line that will satisfy both constituencies and make the casino
lots of money.
Unfortunately, Esposito couldn't open up his books to show us just

how this plays out at Caesars. (Transparency has its limits.) But a
different set of data, taken from a handicapping contest run by the
online casino CaribSports.com, can address the same issue. In these
data, 285 bettors made more than 20,000 wagers on N.F.L. games.
What do these data show?
The 285 bettors exhibited the typical preferences mentioned above --

a strong bias toward favorites and a weaker one toward visiting teams.
The bookmaker, meanwhile, didn't merely acknowledge these biases
and balance the book down the middle; it appears that the bookmaker
strategically set point spreads to exploit these biases.
How does this work? Let's say that a bookmaker is handicapping a
game between the Broncos and the Pittsburgh Steelers. He first
studies every conceivable element of the game: strengths and
weaknesses, momentum, injuries, tendencies, weather forecast, etc.
He then decides that the true line -- that is, a line that he figures will
give each team a 50 percent chance of winning the bet -- happens to
be Denver minus 7 points. But because of bettor bias, perhaps as
much as 80 percent of the money will inevitably flow to the favorite.
So what if the bookie sets the line a little higher, at 9 points? Denver is
still likely to draw the majority of the wagering, but its chances of
winning the bet are now slightly less than 50 percent. The bookie has
thus managed to tempt the majority of the wagering toward an
outcome that is unlikely, even if only slightly, to happen. Over time,
this pattern will yield the bookie a gross profit margin 20 to 30
percent higher than if he had simply balanced the wagering. In other
words, why should a bookie play for the safe 10 percent vig when he
can play it only slightly less safe and make much more money?
Chuck Esposito, though he is too smart to come out and say so, seems
to be doing precisely the same thing at Caesars. What he will admit is
that he doesn't mind if the wagering on a given game comes in at 80-
20 instead of 50-50, as long as he thinks that Caesars is on the right
side of the imbalance.
the super bowl, meanwhile, is an entirely different beast. A look at the

past reveals this interesting anomaly: whereas only one-tenth of
regular-season N.F.L. games have a final point spread in the double
digits, fully one-third of the past Super Bowls (13 out of 39) had
double-digit point spreads. This is especially surprising since the
Super Bowl matches the best team from each conference, whereas
regular games often pit a good team against a poor one.
What does this yawning gap mean? It suggests that faced with the risk
of wiping out a season's profits, bookmakers play it safe on Super
Bowl Sunday. Unlike a typical N.F.L. game, the Super Bowl gives a
bookie incentive to balance his books and simply pocket the vig. To do
so, he needs to inflate the spread against the favorite even more than
usual, bringing in more underdog money and making the odds of the
favorite's covering the bet even lower than usual.
A strategy of consistently betting the underdog has not done so well in

past Super Bowls, paying off only 17 times in 39 years (the favorite
covered the spread 19 times, and there were three pushes). But a
small sample set should not get in the way of a larger truth: the
economics of bookmaking suggest that betting the underdog today
remains the single best bet of the year.
Hoodwinked?
Information Asymmetries Our book "Freakonomics" includes a
chapter titled "How Is the Ku Klux Klan Like a Group of Real-Estate
Agents?" This chapter was our effort to bring to life the economic
concept known as information asymmetry, a state wherein one party
to a transaction has better information than another party. It is
probably obvious that real-estate agents typically have better
information than their clients. The Klan story was perhaps less
obvious. We argued that the Klan's secrecy -- its rituals, made-up
language, passwords and so on -- formed an information asymmetry
that furthered its aim of terrorizing blacks and others.
But the Klan was not the hero of our story. The hero was a man
named Stetson Kennedy, a white Floridian from an old-line family
who from an early age sought to assail racial and social injustices. Out
of all of his crusades -- for unionism, voting rights and numberless
other causes -- Kennedy is best known for taking on the Klan in the
1940's. In his book "The Klan Unmasked" (originally published in
1954 as "I Rode With the Ku Klux Klan"), Kennedy describes how he
adopted a false identity to infiltrate the Klan's main chapter in
Atlanta, was chosen to serve as a "klavalier" (a Klan strong-arm man)
and repeatedly found himself at the center of astonishing events, all
the while courting great personal risk.
What did Kennedy do with all the secret Klan information he

gathered? He disseminated it like mad: to state prosecutors, to
human rights groups and even to broadcasters like Drew Pearson and
the producers of the "Superman" radio show, who publicly aired the
Klan's heretofore hidden workings. Kennedy took an information
asymmetry and dumped it on its head. And in doing so, we wrote, he
played a significant role in quashing the renaissance of the Klan in
postwar America.
Kennedy has been duly celebrated for his activism: his friend Woody
Guthrie once wrote a song about him, and a Stetson Kennedy Day was
recently declared in St. John's County, Fla., where Kennedy, 89, still
lives. That is where we interviewed him nearly two years ago; our
account of his amazing true story was based on those interviews, "The
Klan Unmasked" and a small mountain of history books and
newspaper articles.

But is Kennedy's story as true as it is amazing?
That was the disturbing question that began to haunt another Florida
author, Ben Green, who in 1992 began writing a book about Harry T.
Moore, a black civil rights advocate who was murdered in 1951. For a
time, Stetson Kennedy was a collaborator on the book. Although
Green was only tangentially interested in Kennedy's Klan infiltration
-- it wasn't central to the Moore story -- he eventually checked out
Kennedy's voluminous archives, held in libraries in New York and
Atlanta.
These papers charted the extraordinarily colorful life of a man who

had been, among other things, a poet, a folklorist, a muckraking
journalist and a union activist. But Green was dismayed to find that
the story told in Kennedy's own papers seemed to be quite different
from what Kennedy wrote in "The Klan Unmasked."
In "The Klan Unmasked," Kennedy posed as an encyclopedia

salesman named John S. Perkins who, in one of his first undercover
maneuvers, visits the former governor of Georgia -- a reputed Klan
sympathizer -- and ingratiates himself by offering to distribute some
hate literature. A document in Kennedy's archives, however, suggests
that Kennedy had indeed met the ex-governor, but not in any
undercover capacity. Rather, he had interviewed him for a book he
was writing -- nor did this document mention any hate literature.
A close examination of Kennedy's archives seems to reveal a recurrent

theme: legitimate interviews that he conducted with Klan leaders and
sympathizers would reappear in "The Klan Unmasked" in different
contexts and with different facts. In a similar vein, the archives offer
evidence that Kennedy covered public Klan events as a reporter but
then recast them in his book as undercover exploits. Kennedy had
also amassed a great deal of literature about the Klan and other hate
groups that he joined, but his own archives suggest that he joined
most of these groups by mail.
So did Kennedy personally infiltrate the Klan in Atlanta, as portrayed

in "The Klan Unmasked"?
In his archives are a series of memos that were submitted to the Anti-
Defamation League, one of several civil rights groups to which
Kennedy reported. Some of the memos were written by him; others
were written by a man identified as John Brown, a union worker and
former Klan official who had changed his ways and offered to
infiltrate the Klan. "This worker is joining the Klan for me," Kennedy
wrote in one memo in early 1946. "I am certain that he can be relied
on."
In Kennedy's subsequent memos -- indeed, in hundreds of pages of

Kennedy's various correspondence from the era -- he matter-of-factly
attributed some of his most powerful Klan information to John
Brown: one of the memos he declared "a report from my informant
inside the Klan on the meeting of Atlanta Klan No. 1 on August 12 and
Atlanta Klan No. 297 on August 15." As John Brown fed inside
information to Kennedy, Kennedy would then relay it to groups like
the A.D.L., as well as to prosecutors and journalists. It wasn't until he
wrote "The Klan Unmasked," several years later, that Kennedy placed
himself, Zelig-like, at the center of all the action.
Ben Green, despite months spent immersed in Kennedy's archives,

could not identify the man once known as John Brown. Green did
manage to interview Dan Duke, a former state prosecutor who, as
rendered in "The Klan Unmasked," worked closely with Kennedy.
Duke agreed that Kennedy "got inside of some [Klan] meetings" but
openly disputed Kennedy's dramatized account of their relationship.
"None of that happened," he told Green. In 1999, when Green finally
published his Harry T. Moore book, "Before His Time," it contained a
footnote labeling "The Klan Unmasked" "a novelization."
Green is not the only person to have concluded that Kennedy has bent
the truth. Jim Clark, who teaches history at the University of Central
Florida, says that Kennedy "built a national reputation on many
things that didn't happen." Meredith Babb, director of the University
Press of Florida, which has published four of Kennedy's books, now
calls Kennedy "an entrepreneurial folklorist." But except for Green's
footnote, they all kept quiet until the retelling of Kennedy's exploits in
"Freakonomics" produced a new round of attention. Why? "It would
be like killing Santa Claus," Green says. "To me, the saddest part of
this story is that what he actually did wasn't enough for him, and he
has felt compelled to make up, embellish or take credit for things he
didn't do."
When presented with documents from his own archives and asked
outright, several weeks ago over lunch near his Florida home, if "The
Klan Unmasked" was "somewhat conflated or fictionalized," Kennedy
said no. "There may have been a bit of dialogue that was not as I
remembered it," he answered. "But beyond that, no." When pressed,
Kennedy did concede that "in some cases I tookthe reports and
actions of this other guy and incorporated them into one narrative."
As it turns out, Kennedy has made such an admission at least once
before. Peggy Bulger, director of the American Folklife Center in the
Library of Congress, wrote a 1992 dissertation called "Stetson
Kennedy: Applied Folklore and Cultural Advocacy," based in part on
extensive interviews with her subject. In an endnote, Bulger writes
that "Kennedy combined his personal experiences undercover with
the narratives provided by John Brown in writing 'I Rode With the Ku
Klux Klan' in 1954."
We weren't very happy, of course, to learn that a story we included in

"Freakonomics" was built on such shaky foundations -- especially
since the book is devoted to upending conventional wisdoms rather
than reinforcing them, and concerning Stetson Kennedy, the most
conventional wisdom of all is his reputation as a Klan infiltrator.
There is also the fact that in our work we make a point of depending
less on anecdote in favor of data, the idea being that numbers tend to
lie less baldly than people do. But the story of Stetson Kennedy was
one long series of anecdotes -- which, no matter how many times they
were cited over the decades, were nearly all generated by the same
self-interested source.
Perhaps Kennedy's long life of fighting the good fight are all that
matter. Perhaps, to borrow Peggy Bulger's phraseology, a goal of
"cultural advocacy" calls for the use of "applied folklore" rather than
the sort of forthrightness that should be more typical of history or
journalism. One thing that does remain true is that Kennedy was
certainly a master of information asymmetry. Until, that is, the data
caught up with him.
The Economy of Desire
Analyzing a Sex Survey
What is a price?
Unless you're an economist, you probably think of a price as simply

the amount you pay for a given thing -- the number of dollars you
surrender for, let's say, Sunday brunch at your favorite neighborhood
restaurant. But to an economist, price is a much broader concept. The
20 minutes you spend waiting for a table is part of the price. So, too,
is any nutritional downside of the meal itself: a cheeseburger, as the
economist Kevin Murphy has calculated, costs $2.50 more than a
salad in long-term health implications. There are moral and social
costs to tally as well -- for instance, the look of scorn delivered by your
vegan dining partner as you order the burger. While the restaurant's
menu may list the price of the cheeseburger at $7.95, that is clearly
just the beginning.
The most fundamental rule of economics is that a rise in price leads to

less quantity demanded. This holds true for a restaurant meal, a real-
estate deal, a college education or just about anything else you can
think of. When the price of an item rises, you buy less of it (which is
not to say, of course, that you want less of it).
But what about sex? Sex, that most irrational of human pursuits,
couldn't possibly respond to rational price theory, could it?
Outside of a few obvious situations, we generally don't think about sex

in terms of prices. Prostitution is one such situation; courtship is
another: certain men seem to consider an expensive dinner a prudent
investment in pursuit of a sexual dividend.

But how might price changes affect sexual behavior? And might those
changes have something to tell us about the nature of sex itself?
Here is a stark example: A man who is sent to prison finds that the
price of sex with a woman has spiked -- talk about a supply shortage --
and he becomes much more likely to start having sex with men. The
reported prevalence of oral sex among affluent American teenagers
would also seem to illustrate price theory: because of the possibility of
disease or pregnancy, intercourse is expensive -- and it has come to be
seen by some teenagers as an unwanted and costly pledge of
commitment. In this light, oral sex may be viewed as a cheaper
alternative.
In recent decades, we have witnessed the most exorbitant new price

associated with sex: the H.I.V. virus. Because AIDS is potentially
deadly and because it can be spread relatively easily by sex between
two men, the onset of AIDS in the early 1980's caused a significant
increase in the price of gay sex. Andrew Francis, a graduate student in
economics at the University of Chicago, has tried to affix a dollar
figure to this change. Setting the value of an American life at $2
million, Francis calculated that in terms of AIDS-related mortality, it
cost $1,923.75 in 1992 (the peak of the AIDS crisis) for a man to have
unprotected sex once with a random gay American man versus less
than $1 with a random woman. While the use of a condom greatly
reduces the risk of contracting AIDS, a condom is, of course, yet
another cost associated with sex. In a study of Mexican prostitution,
the Berkeley economist Paul Gertler and two co-authors showed that
when a client requested sex without a condom, a prostitute was
typically paid a 24 percent premium over her standard fee.
Francis, in a draft paper titled "The Economics of Sexuality," tries to

go well beyond dollar figures. He puts forth an empirical argument
that may fundamentally challenge how people think about sex.
As with any number of behaviors that social scientists try to measure,

sex is a tricky subject. But Francis discovered a data set that offered
some intriguing possibilities. The National Health and Social Life
Survey, sponsored by the U.S. government and a handful of
foundations, asked almost 3,500 people a rather astonishing variety
of questions about sex: the different sexual acts received and
performed and with whom and when; questions about sexual
preference and identity; whether they knew anyone with AIDS. As
with any self-reported data, there was the chance that the survey
wasn't reliable, but it had been designed to ensure anonymity and
generate honest replies.
The survey was conducted in 1992, when the disease was much less
treatable than it is today. Francis first looked to see if there was a
positive correlation between having a friend with AIDS and
expressing a preference for homosexual sex. As he expected, there
was. "After all, people pick their friends," he says, "and homosexuals
are more likely to have other homosexuals as friends."
But you don't get to pick your family. So Francis next looked for a
correlation between having a relative with AIDS and expressing a
homosexual preference. This time, for men, the correlation was
negative. This didn't seem to make sense. Many scientists believe that
a person's sexual orientation is determined before birth, a function of
genetic fate. If anything, people in the same family should be more
likely to share the same orientation. "Then I realized, Oh, my God,
they were scared of AIDS," Francis says.
Francis zeroed in on this subset of about 150 survey respondents who

had a relative with AIDS. Because the survey compiled these
respondents' sexual histories as well as their current answers about
sex, it allowed Francis to measure, albeit crudely, how their lives may
have changed as a result of having seen up close the costly horrors of
AIDS.
Here's what he found: Not a single man in the survey who had a
relative with AIDS said he had had sex with a man in the previous five
years; not a single man in that group declared himself to be attracted
to men or to consider himself homosexual. Women in that group also
shunned sex with men. For them, rates of recent sex with women and
of declaring homosexual identity and attraction were more than twice
as high as those who did not have a relative with AIDS.
Because the sample size was so small -- simple chance suggests that
no more than a handful of men in a group that size would be attracted
to men -- it is hard to reach definitive conclusions from the survey
data. (Obviously, not every single man changes his sexual behavior or
identity when a relative contracts AIDS.) But taken as a whole, the
numbers in Francis's study suggest that there may be a causal effect
here -- that having a relative with AIDS may change not just sexual
behavior but also self-reported identity and desire.
In other words, sexual preference, while perhaps largely

predetermined, may also be subject to the forces more typically
associated with economics than biology. If this turns out to be true, it
would change the way that everyone -- scientists, politicians,
theologians -- thinks about sexuality. But it probably won't much
change the way economists think. To them, it has always been clear:
whether we like it or not, everything has its price.
Analyzing a Sex Survey
What is a price?
Unless you're an economist, you probably think of a price as simply

the amount you pay for a given thing -- the number of dollars you
surrender for, let's say, Sunday brunch at your favorite neighborhood
restaurant. But to an economist, price is a much broader concept. The
20 minutes you spend waiting for a table is part of the price. So, too,
is any nutritional downside of the meal itself: a cheeseburger, as the
economist Kevin Murphy has calculated, costs $2.50 more than a
salad in long-term health implications. There are moral and social
costs to tally as well -- for instance, the look of scorn delivered by your
vegan dining partner as you order the burger. While the restaurant's
menu may list the price of the cheeseburger at $7.95, that is clearly
just the beginning.
The most fundamental rule of economics is that a rise in price leads to

less quantity demanded. This holds true for a restaurant meal, a real-
estate deal, a college education or just about anything else you can
think of. When the price of an item rises, you buy less of it (which is
not to say, of course, that you want less of it).
But what about sex? Sex, that most irrational of human pursuits,
couldn't possibly respond to rational price theory, could it?
Outside of a few obvious situations, we generally don't think about sex

in terms of prices. Prostitution is one such situation; courtship is
another: certain men seem to consider an expensive dinner a prudent
investment in pursuit of a sexual dividend.

But how might price changes affect sexual behavior? And might those
changes have something to tell us about the nature of sex itself?
Here is a stark example: A man who is sent to prison finds that the
price of sex with a woman has spiked -- talk about a supply shortage --
and he becomes much more likely to start having sex with men. The
reported prevalence of oral sex among affluent American teenagers
would also seem to illustrate price theory: because of the possibility of
disease or pregnancy, intercourse is expensive -- and it has come to be
seen by some teenagers as an unwanted and costly pledge of
commitment. In this light, oral sex may be viewed as a cheaper
alternative.
In recent decades, we have witnessed the most exorbitant new price

associated with sex: the H.I.V. virus. Because AIDS is potentially
deadly and because it can be spread relatively easily by sex between
two men, the onset of AIDS in the early 1980's caused a significant
increase in the price of gay sex. Andrew Francis, a graduate student in
economics at the University of Chicago, has tried to affix a dollar
figure to this change. Setting the value of an American life at $2
million, Francis calculated that in terms of AIDS-related mortality, it
cost $1,923.75 in 1992 (the peak of the AIDS crisis) for a man to have
unprotected sex once with a random gay American man versus less
than $1 with a random woman. While the use of a condom greatly
reduces the risk of contracting AIDS, a condom is, of course, yet
another cost associated with sex. In a study of Mexican prostitution,
the Berkeley economist Paul Gertler and two co-authors showed that
when a client requested sex without a condom, a prostitute was
typically paid a 24 percent premium over her standard fee.
Francis, in a draft paper titled "The Economics of Sexuality," tries to

go well beyond dollar figures. He puts forth an empirical argument
that may fundamentally challenge how people think about sex.
As with any number of behaviors that social scientists try to measure,

sex is a tricky subject. But Francis discovered a data set that offered
some intriguing possibilities. The National Health and Social Life
Survey, sponsored by the U.S. government and a handful of
foundations, asked almost 3,500 people a rather astonishing variety
of questions about sex: the different sexual acts received and
performed and with whom and when; questions about sexual
preference and identity; whether they knew anyone with AIDS. As
with any self-reported data, there was the chance that the survey
wasn't reliable, but it had been designed to ensure anonymity and
generate honest replies.
The survey was conducted in 1992, when the disease was much less
treatable than it is today. Francis first looked to see if there was a
positive correlation between having a friend with AIDS and
expressing a preference for homosexual sex. As he expected, there
was. "After all, people pick their friends," he says, "and homosexuals
are more likely to have other homosexuals as friends."
But you don't get to pick your family. So Francis next looked for a
correlation between having a relative with AIDS and expressing a
homosexual preference. This time, for men, the correlation was
negative. This didn't seem to make sense. Many scientists believe that
a person's sexual orientation is determined before birth, a function of
genetic fate. If anything, people in the same family should be more
likely to share the same orientation. "Then I realized, Oh, my God,
they were scared of AIDS," Francis says.
Francis zeroed in on this subset of about 150 survey respondents who

had a relative with AIDS. Because the survey compiled these
respondents' sexual histories as well as their current answers about
sex, it allowed Francis to measure, albeit crudely, how their lives may
have changed as a result of having seen up close the costly horrors of
AIDS.
Here's what he found: Not a single man in the survey who had a
relative with AIDS said he had had sex with a man in the previous five
years; not a single man in that group declared himself to be attracted
to men or to consider himself homosexual. Women in that group also
shunned sex with men. For them, rates of recent sex with women and
of declaring homosexual identity and attraction were more than twice
as high as those who did not have a relative with AIDS.
Because the sample size was so small -- simple chance suggests that
no more than a handful of men in a group that size would be attracted
to men -- it is hard to reach definitive conclusions from the survey
data. (Obviously, not every single man changes his sexual behavior or
identity when a relative contracts AIDS.) But taken as a whole, the
numbers in Francis's study suggest that there may be a causal effect
here -- that having a relative with AIDS may change not just sexual
behavior but also self-reported identity and desire.
In other words, sexual preference, while perhaps largely

predetermined, may also be subject to the forces more typically
associated with economics than biology. If this turns out to be true, it
would change the way that everyone -- scientists, politicians,
theologians -- thinks about sexuality. But it probably won't much
change the way economists think. To them, it has always been clear:
whether we like it or not, everything has its price.
Why Vote?
A Swiss Turnout-Boosting Experiment
Within the economics departments at certain universities, there is a

famous but probably apocryphal story about two world-class
economists who run into each other at the voting booth.
"What are you doing here?" one asks.
"My wife made me come," the other says.
The first economist gives a confirming nod. "The same."
After a mutually sheepish moment, one of them hatches a plan: "If

you promise never to tell anyone you saw me here, I'll never tell
anyone I saw you." They shake hands, finish their polling business
and scurry off.
Why would an economist be embarrassed to be seen at the voting

booth? Because voting exacts a cost -- in time, effort, lost productivity
-- with no discernible payoff except perhaps some vague sense of
having done your "civic duty." As the economist Patricia Funk wrote
in a recent paper, "A rational individual should abstain from voting."

The odds that your vote will actually affect the outcome of a given
election are very, very, very slim. This was documented by the
economists Casey Mulligan and Charles Hunter, who analyzed more
than 56,000 Congressional and state-legislative elections since 1898.
For all the attention paid in the media to close elections, it turns out
that they are exceedingly rare. The median margin of victory in the
Congressional elections was 22 percent; in the state-legislature
elections, it was 25 percent. Even in the closest elections, it is almost
never the case that a single vote is pivotal. Of the more than 40,000
elections for state legislator that Mulligan and Hunter analyzed,
comprising nearly 1 billion votes, only 7 elections were decided by a
single vote, with 2 others tied. Of the more than 16,000 Congressional
elections, in which many more people vote, only one election in the
past 100 years -- a 1910 race in Buffalo -- was decided by a single vote.
But there is a more important point: the closer an election is, the
more likely that its outcome will be taken out of the voters' hands --
most vividly exemplified, of course, by the 2000 presidential race. It
is true that the outcome of that election came down to a handful of
voters; but their names were Kennedy, O'Connor, Rehnquist, Scalia
and Thomas. And it was only the votes they cast while wearing their
robes that mattered, not the ones they may have cast in their home
precincts.
Still, people do continue to vote, in the millions. Why? Here are three
possibilities:
1. Perhaps we are just not very bright and therefore wrongly believe
that our votes will affect the outcome.
2. Perhaps we vote in the same spirit in which we buy lottery tickets.

After all, your chances of winning a lottery and of affecting an election
are pretty similar. From a financial perspective, playing the lottery is a
bad investment. But it's fun and relatively cheap: for the price of a
ticket, you buy the right to fantasize how you'd spend the winnings --
much as you get to fantasize that your vote will have some impact on
policy.
3. Perhaps we have been socialized into the voting-as-civic-duty idea,

believing that it's a good thing for society if people vote, even if it's not
particularly good for the individual. And thus we feel guilty for not
voting.
But wait a minute, you say. If everyone thought about voting the way
economists do, we might have no elections at all. No voter goes to the
polls actually believing that her single vote will affect the outcome,
does she? And isn't it cruel to even suggest that her vote is not worth
casting?
This is indeed a slippery slope -- the seemingly meaningless behavior

of an individual, which, in aggregate, becomes quite meaningful.
Here's a similar example in reverse. Imagine that you and your 8-
year-old daughter are taking a walk through a botanical garden when
she suddenly pulls a bright blossom off a tree.
"You shouldn't do that," you find yourself saying.
"Why not?" she asks.
"Well," you reason, "because if everyone picked one, there wouldn't be

any flowers left at all."
"Yeah, but everybody isn't picking them," she says with a look. "Only
me."
In the old days, there were more pragmatic incentives to vote.

Political parties regularly paid voters $5 or $10 to cast the proper
ballot; sometimes payment came in the form of a keg of whiskey, a
barrel of flour or, in the case of an 1890 New Hampshire
Congressional race, a live pig.
Now as then, many people worry about low voter turnout -- only
slightly more than half of eligible voters participated in the last
presidential election -- but it might be more worthwhile to stand this
problem on its head and instead ask a different question: considering
that an individual's vote almost never matters, why do so many people
bother to vote at all?
The answer may lie in Switzerland. That's where Patricia Funk

discovered a wonderful natural experiment that allowed her to take
an acute measure of voter behavior.
The Swiss love to vote -- on parliamentary elections, on plebiscites, on

whatever may arise. But voter participation had begun to slip over the
years (maybe they stopped handing out live pigs there too), so a new
option was introduced: the mail-in ballot. Whereas each voter in the
U.S. must register, that isn't the case in Switzerland. Every eligible
Swiss citizen began to automatically receive a ballot in the mail, which
could then be completed and returned by mail.
From a social scientist's perspective, there was beauty in the setup of

this postal voting scheme: because it was introduced in different
cantons (the 26 statelike districts that make up Switzerland) in
different years, it allowed for a sophisticated measurement of its
effects over time.
Never again would any Swiss voter have to tromp to the polls during a
rainstorm; the cost of casting a ballot had been lowered significantly.
An economic model would therefore predict voter turnout to increase
substantially. Is that what happened?
Not at all. In fact, voter turnout often decreased, especially in smaller

cantons and in the smaller communities within cantons. This finding
may have serious implications for advocates of Internet voting --
which, it has long been argued, would make voting easier and
therefore increase turnout. But the Swiss model indicates that the
exact opposite might hold true.
But why is this the case? Why on earth would fewer people vote when
the cost of doing so is lowered?
It goes back to the incentives behind voting. If a given citizen doesn't

stand a chance of having her vote affect the outcome, why does she
bother? In Switzerland, as in the U.S., "there exists a fairly strong
social norm that a good citizen should go to the polls," Funk writes.
"As long as poll-voting was the only option, there was an incentive (or
pressure) to go to the polls only to be seen handing in the vote. The
motivation could be hope for social esteem, benefits from being
perceived as a cooperator or just the avoidance of informal sanctions.
Since in small communities, people know each other better and gossip
about who fulfills civic duties and who doesn't, the benefits of norm
adherence were particularly high in this type of community."
In other words, we do vote out of self-interest -- a conclusion that will

satisfy economists -- but not necessarily the same self-interest as
indicated by our actual ballot choice. For all the talk of how people
"vote their pocketbooks," the Swiss study suggests that we may be
driven to vote less by a financial incentive than a social one. It may be
that the most valuable payoff of voting is simply being seen at the
polling place by your friends or co-workers.
Unless, of course, you happen to be an economist.

Dog-Waste Management
The DNA of Dog Dirt Twenty-five hundred tons. That's how much
manure was produced every day by the 200,000 horses that moved
people and goods around New York City in the late 19th century.
Much of the manure went uncollected, which posed a terrible
problem. (This is to say nothing of the horse urine, the deafening
clatter of hooves or the carcasses left to rot in the street.) The manure
was so widespread and smelly and unsanitary that brownstones were
built with their entrances on the second floor so that homeowners
might rise above it.
Like so many seemingly overwhelming problems, this one was

resolved, quite painlessly, by technology. The electric streetcar and
then the automobile led to the disappearance of the horses, and with
them went their dung.
Most of the animal dung produced in today's New York comes from
our dogs. (Estimates of the dog population vary widely, but one
million is a good guess.) All their poop doesn't just lie there, of course.
In 1978, New York enacted its famous (and widely imitated) "pooper
scooper" law, and the city is plainly cleaner, poop-wise, than it was.
But with a fine of just $50 for the first offense, the law doesn't provide
much financial incentive to pick up after your dog. Nor does it seem to
be vigorously enforced. Let's pretend that 99 percent of all dog owners
do obey the law. That still leaves 10,000 dogs whose poop is left in
public spaces each day. Over the last year, the city ticketed only 471
dog-waste violations, which suggests that the typical offender stands a
roughly 1-in-8,000 chance of getting a ticket. So here's a puzzle: why
do so many people pick up after their dogs? This would seem to be a
case in which social incentives -- the hard glare of a passer-by and the
offender's feelings of guilt -- are at least as powerful as financial and
legal incentives.

If social forces get us most of the way there, how do we deal with the
occasional miscreant who fails to scoop? After all, a walk through just
about any New York neighborhood confirms that compliance with the
law is hardly complete. The Parks Department, meanwhile, which
conducts regular cleanliness checks of parks and playgrounds, says
that dog poop accounts for 20 percent of its "cleanliness failures." Dog
poop is plainly far less of a nuisance than horse manure ever was. But
if you are, say, a parent who walks two kids to school every day and
tries to keep all three of you from experiencing that telltale soft smush
of a misstep, it is a nuisance nonetheless.
With horses, the solution was simply to eliminate them. Might there
be a way to get rid of dog poop without getting rid of the dogs? It
might help for a moment to think of a dog as if it were a gun. Using
laws to eliminate guns has proved extremely difficult. A given gun
lasts a very long time, and as with dogs, guns are widely loved. But
getting rid of guns should never have been the point of gun control;
the point, rather, ought to be getting rid of the misuse of guns -- that
is, the use of guns in crimes. Consequently, the most successful
policies are those that directly punish misuse, like mandatory prison
sentences for any crime involving a gun. In California and elsewhere,
such measures have substantially reduced gun crime.
Similarly, the problem in New York is not so much with dogs per se.
So perhaps attending to the real problem -- their poop -- will prompt
a solution.
Here's an idea: DNA sampling. During the licensing procedure, every

dog will have to provide a sample of saliva or blood to establish a DNA
file. Then, whenever a pile of poop is found on the sidewalk, a sample
can be taken to establish the offender's DNA. (Because stomachs and
intestinal walls shed so many cells, poop is in fact a robust DNA
source; during a murder trial in Indiana in 2002, the defendant was
convicted in large part because the dog poop in his sneaker tread
linked him to the scene of the crime.) Once the fecal DNA is matched
to a given dog's DNA file, the dog's owner will be mailed a ticket. It
might cost about $30 million to establish a DNA sample for all the
dogs of New York. If people stop violating the law, then New York has
spent $30 million for cleaner streets; if not, the $30 million is seed
money for a new revenue stream.
Unfortunately, there's a big drawback to this plan. In order to match a

pile of poop with its source, you will need to have every dog's DNA on
file -- and in 2003, the most recent year on record, only 102,004 dogs
in New York were licensed. Even though a license is legally required,
costs a mere $8.50 a year and can be easily obtained by mail, most
dog owners ignore the law, and with good reason: last year, only 68
summonses were issued in New York City for unlicensed dogs. So
even if the DNA plan were enacted today, most offenders would still
go unpunished. In fact, it stands to reason that the typical licensed
dog is less likely to offend than the typical unlicensed dog, since the
sort of owner who is responsible enough to license his dog is also
most likely responsible enough to clean up after it.
How, then, to get all of New York's dogs licensed? Instead of charging
even a nominal fee, the city may want to pay people to license their
dogs. And then, instead of treating the licensing law as optional,
enforce it for real. Setting up random street checks for dog licenses
may offend some New Yorkers, but it certainly dovetails nicely with
the Giuliani-era "broken windows" approach to low-level crime.
Before you dismiss the entire dog-DNA idea as idiotic -- which,

frankly, we were about to do the moment it popped into our heads --
consider this: it turns out that civic leaders in Vienna and Dresden
have recently floated the same idea. (Indeed, one Vienna politician
cited Mayor Giuliani as his inspiration.) Closer to home, an eighth-
grade girl in Hoboken, N.J., has also proposed the DNA solution.
During a meeting last year of the Hoboken City Council, Lauren
Mecka, the daughter of a police captain, argued her dog-poop case.
"While adults like yourselves are appalled and disgusted by the sight
of the uncollected dog poop that adorns our parks and sidewalks," she
said, "it is children like myself and younger who run the greater risk
of contact and exposure. We're the ones who ride our bikes, throw our
balls and roll our blades on the city's sidewalks. And we're the ones
who have our picnics, stage our adventures and carry out our dragon-
slaying fantasies on our parks' grassy lawns."
The council, Mecka says today, didn't seem to take her proposal
seriously. Why? "They dismissed it, basically, because I was a 12-year-
old kid."
Does the Truth Lie Within?
The Accidental Diet
Seth Roberts is a 52-year-old psychology professor at the University

of California at Berkeley. If you knew Roberts 25 years ago, you might
remember him as a man with problems. He had acne, and most days
he woke up too early, which left him exhausted. He wasn't depressed,
but he wasn't always in the best of moods. Most troubling to Roberts,
he was overweight: at 5-foot-11, he weighed 200 pounds.
When you encounter Seth Roberts today, he is a clear-skinned, well-

rested, entirely affable man who weighs about 160 pounds and looks
10 years younger than his age. How did this happen?
It began when Roberts was a graduate student. First he had the clever
idea of turning his personal problems into research subjects. Then he
decided that he would use his own body as a laboratory. Thus did
Roberts embark on one of the longest bouts of scientific self-
experimentation known to man -- not only poking, prodding and
measuring himself more than might be wise but also rigorously
recording every data point along the way.
Self-experimentation, though hardly a new idea in the sciences,

remains rare. Many modern scientists dismiss it as being not nearly
scientific enough: there is no obvious control group, and you can
hardly run a double-blind experiment when the researcher and
subject are the same person. But might the not-quite-scientific nature
of self-experimentation also be a good thing? A great many
laboratory-based scientific experiments, especially those in the
medical field, are later revealed to have been marred by poor
methodology or blatant self-interest. In the case of Roberts, his self-
interest is extreme, but at least it is obvious. His methodology is so
simple -- trying a million solutions until he finds one that works --
that it creates the utmost transparency.

In some ways, self-experimentation has more in common with
economics than with the hard sciences. Without the ability to run
randomized experiments, economists are often left to exploit
whatever data they can get hold of. Let's say you're an economist
trying to measure the effect of imprisonment on crime rates. What
you would ideally like to do is have a few randomly chosen states
suddenly release 10,000 prisoners, while another few random states
lock up an extra 10,000 people. In the absence of such a perfect
experiment, you are forced to rely on creative proxies -- like lawsuits
that charge various states with prison overcrowding, which down the
road lead to essentially random releases of large numbers of
prisoners. (And yes, crime in those states does rise sharply after the
prisoners are released.)
What could be a more opportunistic means of generating data than

exploiting your own body? Roberts started small, with his acne, then
moved on to his early waking. It took him more than 10 years of
experimenting, but he found that his morning insomnia could be
cured if, on the previous day, he got lots of morning light, skipped
breakfast and spent at least eight hours standing.
Stranger yet was the fix he discovered for lifting his mood: at least one
hour each morning of TV viewing, specifically life-size talking heads --
but never such TV at night. Once he stumbled upon this solution,
Roberts, like many scientists, looked back to the Stone Age for
explication. Anthropological research suggests that early humans had
lots of face-to-face contact every morning but precious little after
dark, a pattern that Roberts's TV viewing now mimicked.
It was also the Stone Age that informed his system of weight control.
Over the years, he had tried a sushi diet, a tubular-pasta diet, a five-
liters-of-water-a-day diet and various others. They all proved
ineffective or too hard or too boring to sustain. He had by now come
to embrace the theory that our bodies are regulated by a "set point," a
sort of Stone Age thermostat that sets an optimal weight for each
person. This thermostat, however, works the opposite of the one in
your home. When your home gets cold, the thermostat turns on the
furnace. But according to Roberts's interpretation of the set-point
theory, when food is scarcer, you become less hungry; and you get
hungrier when there's a lot of food around.
This may sound backward, like telling your home's furnace to run
only in the summer. But there is a key difference between home heat
and calories: while there is no good way to store the warm air in your
home for the next winter, there is a way to store today's calories for
future use. It's called fat. In this regard, fat is like money: you can
earn it today, put it in the bank and withdraw it later when needed.
During an era of scarcity -- an era when the next meal depended on a
successful hunt, not a successful phone call to Hunan Garden -- this
set-point system was vital. It allowed you to spend down your fat
savings when food was scarce and make deposits when food was
plentiful. Roberts was convinced that this system was accompanied by
a powerful signaling mechanism: whenever you ate a food that was
flavorful (which correlated with a time of abundance) and familiar
(which indicated that you had eaten this food before and benefited
from it), your body demanded that you bank as many of those calories
as possible.
Roberts understood that these signals were learned associations -- as

dependable as Pavlov's bell -- that once upon a time served
humankind well. Today, however, at least in places with constant
opportunities to eat, these signals can lead to a big, fat problem:
rampant overeating.
So Roberts tried to game this Stone Age system. What if he could keep
his thermostat low by sending fewer flavor signals? One obvious
solution was a bland diet, but that didn't interest Roberts. (He is, in
fact, a serious foodie.) After a great deal of experimenting, he
discovered two agents capable of tricking the set-point system. A few
tablespoons of unflavored oil (he used canola or extra light olive oil),
swallowed a few times a day between mealtimes, gave his body some
calories but didn't trip the signal to stock up on more. Several ounces
of sugar water (he used granulated fructose, which has a lower
glycemic index than table sugar) produced the same effect.
(Sweetness does not seem to act as a "flavor" in the body's caloric-
signaling system.)
The results were astounding. Roberts lost 40 pounds and never

gained it back. He could eat pretty much whenever and whatever he
wanted, but he was far less hungry than he had ever been. Friends
and colleagues tried his diet, usually with similar results. His regimen
seems to satisfy a set of requirements that many commercial diets do
not: it was easy, built on a scientific theory and, most important, it did
not leave Roberts hungry.
In the academic community, Roberts's self-experimentation has

found critics but also serious admirers. Among the latter are the
esteemed psychologist Robert Rosenthal, who has praised Roberts for
"approaching data in an exploratory spirit more than, or at least in
addition to, a confirmatory spirit" and for seeing data analysis "as the
opportunity to confront a surprise." Rosenthal went so far as to
envision "a time in the future when 'self-experimenter' became a new
part-time (or full-time) profession."
But will Seth Roberts's strange weight-control solution -- he calls it

the Shangri-La Diet -- really work for the millions of people who need
it? We may soon find out. With the Atkins diet company filing for
bankruptcy, America is eager for its next diet craze. And a few
spoonfuls of sugar may be just the kind of sacrifice that Americans
can handle.
Up in Smoke
Developing a Crack Index If you rely on the news media for your information,
you probably think that crack cocaine is a thing of the past. If you rely on data,
however, you reach a different conclusion.
Measuring the use and impact of a drug like crack isn't easy. There is no
government Web site to provide crack data, and surveying dealers is bound to
be pretty unreliable. So how can you get to the truth of crack use? One way is
to look at a variety of imperfect but plausible proxies, including cocaine
arrests, emergency-room visits and deaths. Unlike the volume of news
coverage, the rates for all of these remain shockingly high. Cocaine arrests, for
instance, have fallen only about 15 percent since the crack boom of the late
1980's. Cocaine-related deaths are actually higher now; so are the number of
emergency-room visits due to cocaine. When combined in a sensible way,
these proxies can be used to construct a useful index of crack.
And what does this index reveal? That crack use was nonexistent until the
early 1980's and spiked like mad in 1985, peaking in 1989. That it arrived early
on the West Coast, but became most prevalent in the cities of the Northeast
and Middle Atlantic States. And that it produced a remarkable level of gun
violence, particularly among young black men, who made up the bulk of street-
level crack dealers. During the crack boom, the homicide rate among 13- to 17-
year-old blacks nearly quintupled. But perhaps the biggest surprise in the
crack index is the fact that, as of 2000 -- the most recent year for which the
index data are available -- Americans were still smoking about 70 percent as
much crack as they smoked when consumption was at its peak.
If so much crack is still being sold and bought, why aren't we hearing about it?
Because crack-associated violence has largely disappeared. And it was the
violence that made crack most relevant to the middle class. What made the
violence go away? Simple economics. Urban street gangs were the main
distributors of crack cocaine. In the beginning, demand for their product was
phenomenal, and so were the potential profits. Most crack killings, it turns out,
were not a result of some crackhead sticking up a grandmother for drug money
but rather one crack dealer shooting another -- and perhaps a few bystanders
-- in order to gain turf.
But the market changed fast. The destructive effects of the drug became
apparent; young people saw the damage that crack inflicted on older users and
began to stay away from it. (One recent survey showed that crack use is now
three times as common among people in their late 30's as it is among those in
their late teens and early 20's.) As demand fell, price wars broke out, driving
down profits. And as the amount of money at stake grew smaller and smaller,
the violence also dissipated. Young gang members are still selling crack on
street corners, but when a corner becomes less valuable, there is less incentive
to kill, or be killed, for it.
So how can it be that crack consumption is still so high? Part of the answer
may have to do with geography. The index shows that consumption is actually
up in states far from the coasts, like Arizona, Minnesota, Colorado and
Michigan. But the main answer lies in the same price shift that made the crack
trade less violent. The price has fallen about 75 percent from its peak, which
has led to an interesting consumption pattern: there are far fewer users, but
they are each smoking more crack. This, too, makes perfect economic sense. If
you are a devoted crackhead and the price is one-fourth what it used to be, you
can afford to smoke four times as much.
But as crack has matured into a drug that causes less social harm, the laws
punishing its sale have stayed the same. In 1986, in the national frenzy that
followed the death of Len Bias, a first-round N.B.A. draft pick and a cocaine
user, Congress passed legislation requiring a five-year mandatory sentence for
selling just five grams of crack; you would have to sell 500 grams of powder
cocaine to get an equivalent sentence. This disparity has often been called
racist, since it disproportionately imprisons blacks.
In fact, the law probably made sense at the time, when a gram of crack did
have far more devastating social costs than a gram of powder cocaine. But it
doesn't anymore. Len Bias would now be 40 years old, and he would have long
outlived his usefulness to the Boston Celtics. It may be time to acknowledge
that the law inspired by his death has done the same.
The Seat-Belt Solution
A Car-Seat Crash Test On a recent Monday morning, nearly 20 police
officers gathered in Clarkstown, N.Y., for a four-day seminar. They
had assembled to fight one of modernity's great scourges: child deaths
in motor-vehicle crashes. Each officer was given a 345-page training
manual issued by the National Highway Traffic Safety Administration
(NHTSA). At seminar's end, each would be certified as a "child
passenger safety technician," which primarily means that they would
be experts in the installation and use of child car seats.
Why does it take four days to learn about car seats? Because any given
seat is a tangle of straps, tethers and harnesses built by one of dozens
of manufacturers whose products must be secured by the diverse seat-
belt configurations of any passenger vehicle sold in the United States.
According to the NHTSA manual, more than 80 percent of car seats
are improperly installed.
So over the course of those four days, there were many questions to be
answered. But one question about car seats is rarely even asked: How
well do they actually work?
They certainly have the hallmarks of an effective piece of safety

equipment: big and bulky, federally regulated, hard to install and
expensive. (You can easily spend $200 on a car seat.) And NHTSA
data seem to show that car seats are indeed a remarkable lifesaver.
Although motor-vehicle crashes are still the top killer among children
from 2 to 14, fatality rates have fallen steadily in recent decades -- a
drop that coincides with the rise of car-seat use. Perhaps the single
most compelling statistic about car seats in the NHTSA manual was
this one: "They are 54 percent effective in reducing deaths for
children ages 1 to 4 in passenger cars."

But 54 percent effective compared with what? The answer, it turns
out, is this: Compared with a child's riding completely unrestrained.
There is another mode of restraint, meanwhile, that doesn't cost $200
or require a four-day course to master: seat belts.
For children younger than roughly 24 months, seat belts plainly won't
do. For them, a car seat represents the best practical way to ride
securely, and it is certainly an improvement over the days of riding
shotgun on mom's lap. But what about older children? Is it possible
that seat belts might afford them the same protection as car seats?
The answer can be found in a trove of government data called the

Fatality Analysis Reporting System (FARS), which compiles police
reports on all fatal crashes in the U.S. since 1975. These data include
every imaginable variable in a crash, including whether the occupants
were restrained and how.
Even a quick look at the FARS data reveals a striking result: among
children 2 and older, the death rate is no lower for those traveling in
any kind of car seat than for those wearing seat belts. There are many
reasons, of course, that this raw data might be misleading. Perhaps
kids in car seats are, on average, in worse wrecks. Or maybe their
parents drive smaller cars, which might provide less protection.
But no matter what you control for in the FARS data, the results don't
change. In recent crashes and old ones, in big vehicles and small, in
one-car crashes and multiple-vehicle crashes, there is no evidence
that car seats do a better job than seat belts in saving the lives of
children older than 2. (In certain kinds of crashes -- rear-enders, for
instance -- car seats actually perform worse.) The real answer to why
child auto fatalities have been falling seems to be that more and more
children are restrained in some way. Many of them happen to be
restrained in car seats, since that is what the government mandates,
but if the government instead mandated proper seat-belt use for
children, they would likely do just as well / without the layers of
expense, regulation and anxiety associated with car seats.
NHTSA, however, has been pushing the car-seat movement ever

further. The agency now advocates that all older children (usually
starting at about age 4) ride in booster seats, which boost a child to a
height where the adult lap-and-shoulder belts fit properly. Could this
be a step in the wrong direction? In 2001, the Insurance Institute for
Highway Safety sent NHTSA a memo warning that its booster-seat
recommendations were "getting ahead of science and regulations"
and that certain booster seats "did not improve belt fit, and some
actually worsened the fit."
If car seats and booster seats are shown in the FARS data to be no
more effective than seat belts, might it be because so many of them
are improperly installed? To find out, we contacted an independent
lab that conducts crash tests. The idea was simple: compare properly
installed car seats with properly used standard seat belts. We
commissioned two crash tests: a 3-year-old-sized dummy in a car seat
versus a 3-year-old dummy in lap-and-shoulder belt; and a 6-year-
old-sized dummy in a booster seat versus a 6-year-old dummy in lap-
and-shoulder belt.
The conditions of the test ensured that the seats would perform
optimally: they were strapped to old-fashioned bench-style seats
(which give a flush fit) by an experienced engineer (who is
presumably more competent than the average parent). The dummies
in the seat belts were also positioned optimally, sitting upright and
flush.
The chore was gruesome, from start to finish. Each dummy, dressed
in shorts, T-shirt and sneakers, had a skein of wires snaking out of his
body to measure head and chest damage. The pneumatic sled was
fired backward with a frightening bang, simulating a 30 m.p.h. frontal
crash; on impact, the dummy's head, legs and arms jerked forward,
fingers flailing in the air, and then the head recoiled.
Within minutes, we had some data. Though the lap-and-shoulder

belts rode too high on the 3-year-old dummy, the head- and chest-
impact data were only nominally higher than that for the 3-year-old in
the car seat; according to federal standards, most likely neither child
would have been injured. In the second test, the 6-year-old in the
booster and the 6-year-old in the seat belt produced virtually identical
numbers. Again, most likely neither one would have been injured.
These tests don't actually prove much. The sample was too small, the
circumstances were too controlled and the sensors didn't measure
neck or abdominal injuries, which child-safety advocates say are
worse with seat belts. What matter are the crash data from the real
world, where one 4-year-old in a lap-and-shoulder belt may find the
shoulder belt so irritating that he puts it behind his back and another
4-year-old may be in a poorly installed car seat. And when it comes to
real-world situations, the FARS data are extremely compelling.
So if car seats and booster seats aren't the safety miracle that parents
have been taught to believe, what should they do? The most
important thing, certainly, is to make sure that children always ride
with some kind of restraint -- and, depending on your state, a car seat
or booster seat may be the only legal option. On a broader level,
though, it might be worth asking this question: Considering that
Americans spend a few hundred million dollars annually on
complicated contraptions that may not add much lifesaving value,
how much better off might we be if that money was spent to make
existing seat belts fit children? Some automakers do in fact make
integrated child seats (in which, for example, the car's seat back flips
down for the child to sit on); other solutions might include lap-and-
shoulder belts that vertically adjust to fit children, or even a built-in
five-point harness.
It may be that the ultimate benefit of car seats and booster seats is
that they force children to sit still in the back seat. If so, perhaps there
is a different contraption that could help accomplish the same goal for
roughly the same price: a back-seat DVD player.
Monkey Business
Keith Chen's Monkey Research Adam Smith, the founder of classical
economics, was certain that humankind's knack for monetary
exchange belonged to humankind alone. "Nobody ever saw a dog
make a fair and deliberate exchange of one bone for another with
another dog," he wrote. "Nobody ever saw one animal by its gestures
and natural cries signify to another, this is mine, that yours; I am
willing to give this for that." But in a clean and spacious laboratory at
Yale-New Haven Hospital, seven capuchin monkeys have been taught
to use money, and a comparison of capuchin behavior and human
behavior will either surprise you very much or not at all, depending
on your view of humans.
The capuchin is a New World monkey, brown and cute, the size of a
scrawny year-old human baby plus a long tail. "The capuchin has a
small brain, and it's pretty much focused on food and sex," says Keith
Chen, a Yale economist who, along with Laurie Santos, a psychologist,
is exploiting these natural desires -- well, the desire for food at least --
to teach the capuchins to buy grapes, apples and Jell-O. "You should
really think of a capuchin as a bottomless stomach of want," Chen
says. "You can feed them marshmallows all day, they'll throw up and
then come back for more."
When most people think of economics, they probably conjure images

of inflation charts or currency rates rather than monkeys and
marshmallows. But economics is increasingly being recognized as a
science whose statistical tools can be put to work on nearly any aspect
of modern life. That's because economics is in essence the study of
incentives, and how people -- perhaps even monkeys -- respond to
those incentives. A quick scan of the current literature reveals that top
economists are studying subjects like prostitution, rock 'n' roll,
baseball cards and media bias.
Chen proudly calls himself a behavioral economist, a member of a

growing subtribe whose research crosses over into psychology,
neuroscience and evolutionary biology. He began his monkey work as
a Harvard graduate student, in concert with Marc Hauser, a
psychologist. The Harvard monkeys were cotton-top tamarins, and
the experiments with them concerned altruism. Two monkeys faced
each other in adjoining cages, each equipped with a lever that would
release a marshmallow into the other monkey's cage. The only way for
one monkey to get a marshmallow was for the other monkey to pull
its lever. So pulling the lever was to some degree an act of altruism, or
at least of strategic cooperation.

The tamarins were fairly cooperative but still showed a healthy
amount of self-interest: over repeated encounters with fellow
monkeys, the typical tamarin pulled the lever about 40 percent of the
time. Then Hauser and Chen heightened the drama. They conditioned
one tamarin to always pull the lever (thus creating an altruistic
stooge) and another to never pull the lever (thus creating a selfish
jerk). The stooge and the jerk were then sent to play the game with the
other tamarins. The stooge blithely pulled her lever over and over,
never failing to dump a marshmallow into the other monkey's cage.
Initially, the other monkeys responded in kind, pulling their own
levers 50 percent of the time. But once they figured out that their
partner was a pushover (like a parent who buys her kid a toy on every
outing whether the kid is a saint or a devil), their rate of reciprocation
dropped to 30 percent -- lower than the original average rate. The
selfish jerk, meanwhile, was punished even worse. Once her
reputation was established, whenever she was led into the
experimenting chamber, the other tamarins "would just go nuts,"
Chen recalls. "They'd throw their feces at the wall, walk into the
corner and sit on their hands, kind of sulk." Chen is a hyperverbal,
sharp-dressing 29-year-old with spiky hair. The son of Chinese
immigrants, he had an itinerant upbringing in the rural Midwest. As a
Stanford undergraduate, he was a de facto Marxist before being
seduced, quite accidentally, by economics. He may be the only
economist conducting monkey experiments, which puts him at slight
odds with his psychologist collaborators (who are more interested in
behavior itself than in the incentives that produce the behavior) as
well as with certain economist colleagues. "I love interest rates, and
I'm willing to talk about their kind of stuff all the time," he says,
speaking of his fellow economists. "But I can tell that they're biting
their tongues when I tell them what I'm working on."
It is sometimes unclear, even to Chen himself, exactly what he is

working on. When he and Santos, his psychologist collaborator, began
to teach the Yale capuchins to use money, he had no pressing research
theme. The essential idea was to give a monkey a dollar and see what
it did with it. The currency Chen settled on was a silver disc, one inch
in diameter, with a hole in the middle -- "kind of like Chinese money,"
he says. It took several months of rudimentary repetition to teach the
monkeys that these tokens were valuable as a means of exchange for a
treat and would be similarly valuable the next day. Having gained that
understanding, a capuchin would then be presented with 12 tokens on
a tray and have to decide how many to surrender for, say, Jell-O cubes
versus grapes. This first step allowed each capuchin to reveal its
preferences and to grasp the concept of budgeting.
Then Chen introduced price shocks and wealth shocks. If, for
instance, the price of Jell-O fell (two cubes instead of one per token),
would the capuchin buy more Jell-O and fewer grapes? The capuchins
responded rationally to tests like this -- that is, they responded the
way most readers of The Times would respond. In economist-speak,
the capuchins adhered to the rules of utility maximization and price
theory: when the price of something falls, people tend to buy more of
it.
Chen next introduced a pair of gambling games and set out to

determine which one the monkeys preferred. In the first game, the
capuchin was given one grape and, dependent on a coin flip, either
retained the original grape or won a bonus grape. In the second game,
the capuchin started out owning the bonus grape and, once again
dependent on a coin flip, either kept the two grapes or lost one. These
two games are in fact the same gamble, with identical odds, but one is
framed as a potential win and the other as a potential loss.
How did the capuchins react? They far preferred to take a gamble on
the potential gain than the potential loss. This is not what an
economics textbook would predict. The laws of economics state that
these two gambles, because they represent such small stakes, should
be treated equally.
So, does Chen's gambling experiment simply reveal the cognitive

limitations of his small-brained subjects? Perhaps not. In similar
experiments, it turns out that humans tend to make the same type of
irrational decision at a nearly identical rate. Documenting this
phenomenon, known as loss aversion, is what helped the psychologist
Daniel Kahneman win a Nobel Prize in economics. The data
generated by the capuchin monkeys, Chen says, "make them
statistically indistinguishable from most stock-market investors."
But do the capuchins actually understand money? Or is Chen simply

exploiting their endless appetites to make them perform neat tricks?
Several facts suggest the former. During a recent capuchin experiment
that used cucumbers as treats, a research assistant happened to slice
the cucumber into discs instead of cubes, as was typical. One capuchin
picked up a slice, started to eat it and then ran over to a researcher to
see if he could "buy" something sweeter with it. To the capuchin, a
round slice of cucumber bore enough resemblance to Chen's silver
tokens to seem like another piece of currency.
Then there is the stealing. Santos has observed that the monkeys
never deliberately save any money, but they do sometimes purloin a
token or two during an experiment. All seven monkeys live in a
communal main chamber of about 750 cubic feet. For experiments,
one capuchin at a time is let into a smaller testing chamber next door.
Once, a capuchin in the testing chamber picked up an entire tray of
tokens, flung them into the main chamber and then scurried in after
them -- a combination jailbreak and bank heist -- which led to a
chaotic scene in which the human researchers had to rush into the
main chamber and offer food bribes for the tokens, a reinforcement
that in effect encouraged more stealing.
Something else happened during that chaotic scene, something that

convinced Chen of the monkeys' true grasp of money. Perhaps the
most distinguishing characteristic of money, after all, is its fungibility,
the fact that it can be used to buy not just food but anything. During
the chaos in the monkey cage, Chen saw something out of the corner
of his eye that he would later try to play down but in his heart of
hearts he knew to be true. What he witnessed was probably the first
observed exchange of money for sex in the history of monkeykind.
(Further proof that the monkeys truly understood money: the monkey
who was paid for sex immediately traded the token in for a grape.)
This is a sensitive subject. The capuchin lab at Yale has been built and
maintained to make the monkeys as comfortable as possible, and
especially to allow them to carry on in a natural state. The
introduction of money was tricky enough; it wouldn't reflect well on
anyone involved if the money turned the lab into a brothel. To this
end, Chen has taken steps to ensure that future monkey sex at Yale
occurs as nature intended it.
But these facts remain: When taught to use money, a group of

capuchin monkeys responded quite rationally to simple incentives;
responded irrationally to risky gambles; failed to save; stole when
they could; used money for food and, on occasion, sex. In other
words, they behaved a good bit like the creature that most of Chen's
more traditional colleagues study: Homo sapiens.
What The Bagel Man Saw
Once upon a time, Paul F. dreamed big dreams. While studying
agricultural economics at Cornell, he wanted to end world hunger.
Instead, after doctoral work at M.I.T., he wound up taking a job with a
research institute in Washington, analyzing the weapons expenditures
of the United States Navy. This was in 1962. After four years came
more of the same: analyst jobs with the Bureau of the Budget, the
Institute for Defense Analyses, the President's Commission on
Federal Statistics. Still, he dreamed. He had ''potent research ideas,''
as he recalls them now, which the Environmental Protection Agency
failed to appreciate. He developed a statistical means of predicting
cancer clusters, but because he was an economist and not a doctor, he
couldn't make headway with the National Cancer Institute. He still
loved the art of economics -- the data-gathering, the statistical
manipulation, the problem-solving -- but it had led him to a high-
level dead end. He was well paid and unfulfilled. ''I'd go to the office
Christmas party, and people would introduce me to their wives or
husbands as the guy who brings in the bagels,'' he says. '''Oh! You're
the guy who brings in the bagels!' Nobody ever said, 'This is the guy in
charge of the public research group.'''
The bagels had begun as a casual gesture: a boss treating his

employees whenever they won a new research contract. Then he made
it a habit. Every Friday, he would bring half a dozen bagels, a serrated
knife, some cream cheese. When employees from neighboring floors
heard about the bagels, they wanted some, too. Eventually he was
bringing in 15 dozen bagels a week. He set out a cash basket to recoup
his costs. His collection rate was about 95 percent; he attributed the
underpayment to oversight.
In 1984, when his research institute fell under new management, he

took a look at his career and grimaced. ''I was sick of every aspect of
the whole thing,'' he says. ''I was discouraged. I was tired of chasing
contracts. So I said to management: 'I'm getting out of this. I'm going
to sell bagels.'''
His economist friends thought he had lost his mind. They made
oblique remarks (and some not so oblique) about ''a terrible waste of
talent.'' But his wife supported his decision. They had retired their
mortgage; the last of their three children was finishing college.
Driving around the office parks that encircle Washington, he solicited
customers with a simple pitch: early in the morning, he would deliver
some bagels and a cash basket to a company's snack room; he would
return before lunch to pick up the money and the leftovers. It was an
honor-system commerce scheme, and it worked. Within a few years,
he was delivering 700 dozen bagels a week to 140 companies and
earning as much as he had ever made as a research analyst. He had
thrown off the shackles of cubicle life and made himself happy.

He had also -- quite without meaning to -- designed a beautiful
economic experiment. By measuring the money collected against the
bagels taken, he could tell, down to the penny, just how honest his
customers were. Did they steal from him? If so, what were the
characteristics of a company that stole versus a company that did not?
Under what circumstances did people tend to steal more, or less?
As it happens, his accidental study provides a window onto a subject

that has long stymied academics: white-collar crime. (Yes, shorting
the bagel man is white-collar crime, writ however small.) Despite all
the attention paid to companies like Enron, academics know very
little about the practicalities of white-collar crime. The reason? There
aren't enough data.
A key fact of white-collar crime is that we hear about only the very
slim fraction of people who are caught. Most embezzlers lead quiet
and theoretically happy lives; employees who steal company property
are rarely detected. With street crime, meanwhile, that is not the case.
A mugging or a burglary or a murder is usually counted whether or
not the criminal is caught. A street crime has a victim, who typically
reports the crime to the police, which generates data, which in turn
generate thousands of academic papers by criminologists, sociologists
and economists. But white-collar crime presents no obvious victim.
Whom, exactly, did the masters of Enron steal from? And how can
you measure something if you don't know to whom it happened, or
with what frequency, or in what magnitude?
Paul F.'s bagel business was different. It did present a victim. The
victim was Paul F.
It is 3:32 a.m., and Paul F. is barreling down a dark Maryland road

when he jams on the brakes and swears. ''I forgot my hearing aids,'' he
mutters. He throws the gearshift into reverse and proceeds to drive
backward nearly as fast as he had been driving forward.
He is 72, and his business is still thriving. (Thus his request to mask
his full name and his customers' identities: he is wary of potential
competitors poaching his clients.) His daughter, son-in-law and one
other employee now make most of the deliveries. Today is a Friday,
which is the only day Paul F. still drives. Semiretirement has left him
more time to indulge his economist self and tally his data. He now
knows, for instance, that in the past eight years he has delivered
1,375,103 bagels, of which 1,255,483 were eaten. (He has also
delivered 648,341 doughnuts, of which 608,438 were eaten.)
He knows a good deal about the payment rate, too. When he first
went into business, he expected 95 percent payment, based on the
experience at his own office. But just as crime tends to be low on a
street where a police car is parked, the 95 percent rate was artificially
high: Paul F.'s presence had deterred theft. Not only that, but those
bagel eaters knew the provider and had feelings (presumably good
ones) about him. A broad swath of psychological and economic
research has argued that people will pay different amounts for the
same item depending on who is providing it. The economist Richard
Thaler, in his 1985 ''Beer on the Beach'' study, showed that a thirsty
sunbather would pay $2.65 for a beer delivered from a resort hotel
but only $1.50 for the same beer if it came from a shabby grocery
store.
In the real world, Paul F. learned to settle for less than 95 percent.
Now he considers companies ''honest'' if the payment is 90 percent or
more. ''Averages between 80 percent and 90 percent are annoying but
tolerable,'' he says. ''Below 80 percent, we really have to grit our teeth
to continue.''
In recent years, he has seen two remarkable trends in overall payment

rates. The first was a long, slow decline that began in 1992. ''All my
friends say: 'Aha! Clinton!''' Paul F. says. ''Although I must say that
most of my friends are conservative and inclined to see such things
where others might not.'' The second trend revealed in Paul F.'s data
was even starker. Entering the summer of 2001, the overall payment
rate had slipped to about 87 percent. Immediately after Sept. 11, the
rate spiked a full 2 percent and hasn't slipped much since. (If a 2
percent gain in payment doesn't sound like much, think of it this way:
the nonpayment rate fell from 13 percent to 11 percent, which
amounts to a 15 percent decline in theft.) Because many of Paul F.'s
customers are affiliated with national security, there may be a
patriotic element to this 9/11 effect. Or it may represent a more
general surge in empathy. Whatever the reason, Paul F. was grateful
for the boost. He expends a great deal of energy hectoring his low-
paying customers, often in the form of a typewritten note. ''The cost of
bagels has gone up dramatically since the beginning of the year,''
reads one. ''Unfortunately, the number of bagels and doughnuts that
disappear without being paid for has also gone up. Don't let that
continue. I don't imagine that you would teach your children to cheat,
so why do it yourselves?''
He is impatient and cantankerous but in sum agreeable. Dressed in

jeans and sneakers, with busy eyes and a wavy fringe of gray hair, he
awoke this Friday at 3 a.m. Working out of his garage, he first loaded
50 cardboard trays of doughnuts -- a local bakery delivered them
overnight -- into the back of his van. He drives an unmarked white
Ford E-150 rigged with a bagel-warming compartment. (The van was
never stopped during the D.C. sniper attacks, but Paul F.'s tendency
to park at the curb caused problems in the near aftermath of 9/11.
One customer left a note saying: ''Please park in a parking space. You
are freaking a lot of people out.'')
After the doughnuts, Paul F. loaded two dozen money boxes, which he
made himself out of plywood. A money slot is cut into the top. When
he started out, he left behind an open basket for the cash, but too
often the money vanished. Then he tried a coffee can with a slot in its
plastic lid, which also proved too tempting. The wooden box has
worked well. Each year he drops off about 7,000 boxes and loses, on
average, just one to theft. This is an intriguing statistic: the same
people who routinely steal more than 10 percent of his bagels almost
never stoop to stealing his money box -- a tribute to the nuanced
social calculus of theft. From Paul F.'s perspective, an office worker
who eats a bagel without paying is committing a crime; the office
worker apparently doesn't think so. This distinction probably has less
to do with the admittedly small amount of money involved than with
the context of the ''crime.'' (The same office worker who fails to pay
for his bagel might also help himself to a long slurp of soda while he's
filling a glass in a self-serve restaurant, but it is extremely unlikely
that he will leave the restaurant without paying.)
After retrieving his hearing aids, he heads for the bagel shop that
provides him with roughly 50 dozen bagels, in six flavors, every day.
He drives nearly 80 m.p.h. along empty highways and discusses what
he has learned about honesty. He is leery of disparaging individual
companies or even most industries, for fear it will hurt his business.
But he will say that telecom companies have robbed him blind, and
another bagel-delivery man found that law firms aren't worth the
trouble. He also says he believes that employees further up the
corporate ladder cheat more than those down below. He reached this
conclusion in part after delivering for years to one company spread
out over three floors -- an executive floor on top and two lower floors
with sales, service and administrative employees. Maybe, he says, the
executives stole bagels out of a sense of entitlement. (Or maybe
cheating is how they got to be executives.) His biggest surprise? ''I had
idly assumed that in places where security clearance was required for
an individual to have a job, the employees would be more honest than
elsewhere. That hasn't turned out to be true.''
Since he started delivering bagels, Paul F. has kept rigorous data --

which, when run through a computer and measured against external
factors ranging from the local weather to the unemployment rate, can
tell some interesting stories. Other conclusions, meanwhile, are
purely intuitive, based on Paul F.'s 20-year exposure to bagel
behavior.
He has identified two great overriding predictors of a company's

honesty: morale and size. Paul F. has noted a strong correlation
between high payment rates and an office where people seem to like
their boss and their work. (This is one of his intuitive conclusions.) He
also gleans a higher payment rate from smaller offices. (This one is
firmly supported by the data.) An office with a few dozen employees
generally outpays by 3 percent to 5 percent an office with a few
hundred employees. This may seem counterintuitive: in a bigger
office, a bigger crowd is bound to convene around the bagel table --
providing more witnesses to make sure you drop your money in the
box. (Paul F. currently charges $1 for a bagel and 50 cents for a
doughnut.) But in the big-office/small-office comparison, bagel crime
seems to mirror street crime. There is far less crime per capita in rural
areas than in cities, in large part because a rural criminal is more
likely to be known (and therefore caught). Also, a rural community
tends to exert greater social incentives against crime, the main one
being shame.
The bagel data also show a correlation between payment rate and the
local rate of unemployment. Intuition might have argued that these
two factors would be negatively correlated -- that is, when
unemployment is low (and the economy is good), people would tend
to be freer with their cash. ''But I found that as the unemployment
rate goes down, dishonesty goes up,'' Paul F. says. ''My guess is that a
low rate of unemployment means that companies are having to hire a
lower class of employee.'' The data also show that the payment rate
does not change when he raises bagel prices, though volume may
temporarily fall.
If the payment tendencies that Paul F. has noted so far might be

called macro trends, it is the micro trends -- those reflecting personal
mood -- that are perhaps most compelling. Weather, for instance, has
a major effect on the payment rate. Unseasonably pleasant weather
inspires people to pay a significantly higher rate. Unseasonably cold
weather, meanwhile, makes people cheat prolifically; so does heavy
rain and wind. But worst are the holidays. The week of Christmas
produces a 2 percent drop in payment rates -- again, a 15 percent
increase in theft, an effect on the same order, in reverse, as 9/11.
Thanksgiving is nearly as bad; the week of Valentine's Day is also
lousy, as is the week straddling April 15. There are, however, a few
good holidays: July 4, Labor Day and Columbus Day. The difference
in the two sets of holidays? The low-cheating holidays represent little
more than an extra day off from work. The high-cheating holidays are
freighted with miscellaneous anxieties and the high expectations of
loved ones.
As considerable as these oscillations may be, the fact is that a poorly

paying office rarely turns into a well-paying office, or vice versa. This
has led Paul F. to believe in a sobering sort of equilibrium: honest
people are honest, and cheaters will cheat regardless of the
circumstance. ''One time when I was cleaning up leftovers,'' he recalls,
''a man came and took a doughnut while I was standing there, and
started to walk away without putting any money in the box. I never
challenge people about paying, but in that place, despite notes and
appeals to management, the payment rate had been abysmal, and I
was fed up. I said to the guy, 'Are you going to pay for that?' And he
said, 'Oh, I left my wallet in my car,' and started to put the doughnut
back. Now I knew, and he knew that I knew, that he hadn't left his
wallet in the car, but he was too cheap to pay 50 cents for a doughnut
and too brazen to say, 'Oh, I'm sorry, I just wasn't thinking,' which is
what anyone with half a conscience would say.''
Once the van is loaded with fresh bagels, sorted by the dozen into
white paper bags that Paul F. had earlier labeled with customers'
names, he begins his rounds. It is 5:02 a.m. The first stop is an office
building in northern Virginia. His routine is nearly always the same.
He grabs one of the magnetic ID cards dangling from his rearview
mirror, hangs it from his neck, jumps around to the side of the van,
loads up a cardboard box with bagels, doughnuts and a cash box and
practically sprints inside. In the snack room, he dumps the bagels
from their bag, folds back the top of the doughnut tray, plunks his
money box on the table and hustles out. Then back into the van,
which he drives maniacally even from one office-park cul-de-sac to
the next. (When a woman in a Lexus tarries at the entrance to one
parking lot, he calls her terrible names.) Another office building,
another ID card, another delivery. You can tell the defense contractors
by the art on the walls: achingly sensual black-and-white photographs
of missiles and armored personnel carriers. Some of the break rooms
have vending machines whose offerings -- ''Spicy Chicken Biscuit''
and ''Chopped Beefsteak Sandwich'' -- look so vile that the simple
appeal of a warm, fresh bagel becomes all the more apparent.
By 9 a.m., he has made all his deliveries. At 11, he will start picking up
leftovers and the money boxes. Until then, it is time for his weekly
Friday morning breakfast with a dozen of his old economist friends.
They meet in the ground-floor cafeteria of the office building where
one of them now works. They swap gossip, tax tips, Ziploc bags of
pipe tobacco.
These are some of the same friends who 20 years ago told Paul F. that
his bagel business would never work. People cannot be trusted, they
said. Their conversation this morning continues along those lines.
One man cites a story he heard about a toll-collector strike in
England. During the strike, drivers were asked simply to put their
money into a box. As it turned out, the government collected more toll
money during the strike -- which suggests that the drivers were at
least fairly honest, but also that the toll collectors had been skimming
like mad. Another economist at the table is now a tax preparer. He
ticks off a long list of common tax evasions his clients try to use --
lying about the cost basis of stocks is perhaps the favorite -- and
reminds the others that the United States tax code is, like Paul F.'s
bagel business, largely built on an honor system.
Amid all the talk of cheating, lying and scamming, Paul F. takes the
floor to declare his faith in humankind. ''You guys know the story
about the Ring of Gyges, right?'' he says.
A man named Gyges, he explains, came upon a cave and, inside it, a
skeleton wearing a ring. When Gyges put on the ring, he found that it
made him invisible. Now he was faced with a choice: would he use his
invisibility for good or evil? The story comes from Plato's ''Republic.''
It was told by a student named Glaucon, in challenge to a Socratic
teaching about honesty and justice. ''Socrates was arguing against the
idea that people will be dishonest if given the chance,'' Paul F. says.
''His point was that people are good, even without enforcement.''
But Paul F. doesn't tell his friends how Glaucon's story ends. Gyges
actually did woeful things once he got the ring -- seduced the queen,
murdered the king and so on. The story posed a moral question: could
any man resist the temptation of evil if he knew his acts could not be
witnessed? Glaucon seemed to think the answer was no. But Paul F.
sides with Socrates -- for he knows that the answer, at least 89
percent of the time, is yes.

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Having isolated the suspicious transactions in the data, Ben-David

At first glance, these cash-back transactions, while illegal, might

The second loser is the investor who bought the mortgage-backed