Saturday, November 27, 2010

SuperFreakonomics: Chapter 4

Many of our decisions, both inside and outside the investment world, are often based on anecdotal information, anomalies, emotions, or existing opinions. SuperFreakonomics illustrates how applying an economic approach can help us change this. Investors can use the tools described in this book, including better and more prevalent use of data, along with an an understanding of the power of incentives to make better decisions.

This chapter discusses some of the simple solutions that have improved the lives of humanity over time, and contrasts them with some complex solutions that have actually done more harm than good. While people love to complain and refer to the good old days when everything was better, the authors argue that the reality is that our lives have consistently improved over the last 100 years.

The authors discuss a few examples of innovations that have improved our lives. One of these is the seat belt, a simple but effective solution to what used to be high traffic fatality rates. The authors argue that the seat belt has reduced the risk of driving fatalities by 70%.

One of the sub-themes of this chapter is the contrast between solutions from the private sector and those of the government. Because the private sector is focused on profit, their solutions to problems tend to be fairly simple, low-cost fixes. When governments get involved, however, the complexity rises and often results in unintended consequences that actually make the problem worse (e.g. the American Disabilities Act has reduced hires of the disabled because the disabled are harder to fire, protections for endangered species actually do more damage to endangered species because they encourage land owners to make their properties uninhabitable etc.)

The authors end with a look at a future innovation that may save the US billions of dollars worth of damage annually. A group of researchers is working on a relatively simple method of preventing hurricanes using a simple, low-cost, non-polluting device. More on this device, the man behind it, and some of his firm's other inventions are discussed here.

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