S t u d e n t ’ S G u i d e Volume 2: QuantitatiVe analysis and statistics classes PrePared by S. Clayton Palmer Instructor of economIcs Weber state unIversIty J. Lon Carlson assocIate Professor dePartment of economIcs IllInoIs state unIversIty www.HarperAcademic.com P r e fa c e Introduction Welcome to the Student’s Guide to SuperFreakonomics! SuperFreakonomics drives home the point that there is no argument without a statistical analysis of the data. The conclusions in the book have been drawn from the data—using the statistical methods you are being introduced to in your classes. Many students view statistical methods and statistical inference as difficult, if not impossible, to master. However, this perception is often based on the notion that statistics is not applicable to anything that real people deal with. As an old college song says, “We’re working our way through college, to get a lot of knowledge that we’ll probably never, ever, use again.1” SuperFreakonomics dispels this myth. What we learn from Levitt and Dubner is that when you understand the data, you understand the world! As you read SuperFreakonomics, you will see the real-world applications of statistical concepts in specific situations. But, there are no explanations of the statistical methods used. The purpose of this guide is to help you understand the analyses presented in SuperFreakonomics by providing a “bridge” between the material covered in an introductory course in statistics and the engaging top- ics covered in what we consider to be one of the most fascinating books in economics. There is one other task we attempt to accomplish in this guide. The authors of SuperFreakonomics show you what it’s like to think like a statistician. The material we present here is intended to make the job even easier for you. Organization of the Student’s Guide We organized the material in this guide to help you identify the key points in each chapter and to ensure that you have a firm grasp of the key concepts presented in the book. The first section of each chapter in this guide consists of an overview that highlights the major topics and points pre- sented in the book. The overview is designed to alert you to the major topics and is not intended to serve, in any way, as a substitute for the material in the text. The second section of each chapter highlights key statistical concepts and methods that are addressed in the corresponding chapter of SuperFreakonomics. The purpose of this section is to alert you to the major factors that affect the relationships being illustrated. These concepts and methods are not organized the same way your statistics text is organized. Simple concepts and more complex methods show up in the same chapters of SuperFreakonomics. You will learn about simple statistical techniques and more complex methods in all of the chapters. We’ve labeled 1. We’re Working Our Way Through College Music and lyrics by Johnny Mercer & Richard Whiting. From the movie Varsity Show (Warner Bro. 1937) 2 them according to the subjects in your statistical text book so that you can slide more easily from SuperFreakonomics to your text book and vice versa. The third section of each chapter consists of a list of what we have termed “core competencies.” How well you are able to respond to each of the questions listed in this section will be a strong indi- cator of the extent to which you understand the material presented in the book. Using the Student Guide When using the student guide, remember that the overview and discussions of terms are not sub- stitutes for reading SuperFreakonomics. Instead they are designed to flag key topics and alert you to specific items you may have missed. When completing the “core competency” questions, we recom- mend that you avoid using your book or notes to answer the questions on your initial run through. Instead, use the questions as a way to flag topics you have not yet mastered. When you cannot answer a specific question, or you answer it incorrectly, you should take that as a clue: go back and devote more time to the topic. One More Helpful Thought This guide was prepared for students taking a class in quantitative analysis or statistics. Another guide has been prepared for students enrolled in an economics class. It contains descriptions of how the topics of SuperFreakonomics relate standard economic concepts and provides a “bridge” between this book and a traditionally organized economics text. Depending on the class your are taking and the way your instructor has organized the curriculum, you may find the economics-ori- ented student guide helpful. c h a P t e r 1 How Is a Street Prostitute Like a Department-Store Santa? Summary Levitt and Dubner begin Chapter 1 by describing some of the ways women have been abused and discriminated against over time. Then, they point out that although conditions in certain countries have improved dramatically over the last few decades, women still suffer the effects of discrimina- tion. This is especially true in the labor market, where a significant wage differential between men and women continues to persist despite increased educational opportunities and legislative initia- tives such as Title IX. This leads to consideration of the labor market in which women clearly domi- nate the supply side—the market for prostitution. 3 We know that the topic of prostitution may make some instructors uncomfortable. The discomfort factor notwithstanding, however, this topic demonstrates how economic analysis can provide an objective assessment of at least some of the benefits and costs of a profession that provokes a vast range of responses from outside observers. Remind your students to focus on the data! The authors begin their analysis of the market for prostitution by describing what the market was like at the turn of the century in Chicago, and how the subsequent criminalization of this activity affected wages and working conditions over time. Information on relative wages in absolute and current dollars suggests why so many women would consider working as a prostitute. Focusing on the upscale Everleigh Club, the authors also show how manipulation of supply and demand through product differentiation—supply a service that entails greater marginal costs and target that segment of consumers with greater willingness to pay—could result in a price much higher than the broader market equilibrium. They then provide useful insights regarding how society’s objectives might be best met when it comes to enforcement of certain laws, i.e., it is more effective to focus on demand than supply if certain activities are going to be effectively curtailed. The next part of the chapter focuses on information gleaned from data collection efforts by Sudhir Venkatesh that shed considerable light on the current conditions in the market for prostitution in Chicago, ranging from wages and prices for various services rendered to the effects of relying on marketers (e.g., pimps) to sell one’s products or services. At this point, the authors also demonstrate that what may be true in one market—pimps tend to improve market outcomes for prostitutes— may not hold elsewhere, e.g., procuring the services of a realtor does not necessarily leave the seller of a house better off. This portion of the chapter concludes with an examination of the role the police play in controlling prostitution and how the solutions they devise can be at odds with the objectives of policymakers, i.e., the principal-agent problem. Attention then turns to consideration of how the increase in the range of opportunities for edu- cated women to work outside of teaching has simultaneously increased their average pay and dis- advantaged school children. The latter is simply a result of a decrease in the average level of ability of people entering the labor market for teachers. The authors then consider several possible expla- nations for the wage gap between men and women that continues to exist even after the increase in the availability of higher paying jobs for women. The final section tells the story of a woman who decided to become a prostitute on her own terms, and how she used sound marketing strategies and economic principles to achieve a considerable level of financial success. Basic Statistical Concepts 1. Descriptive Statistics. This chapter provides numerous descriptors of data sets. Some examples are: the wages earned by street prostitutes, the wages earned among Americans generally, accounting for differences in gender, the prices charged for various sexual acts performed by street prostitutes. You should use this chapter to as a guide to the various data types, how sur- veys are designed, how data are gathered and how the data are analyzed and presented. 4 Types of Data. Most of the examples cited above are cross-sectional data. This is in contrast to time-series data. The description of how the mean wage of a prostitute has changed over time is an example of time-series data. Make certain to note the difference between these two types of data. In addition, pay attention to what information is qualitative. Among the examples of qualitative data, you will find nominal data—the street names of prostitutes and the locations where sexual services are rendered are examples. Data Gathering Techniques. How were the data on prostitution gathered? Sudhir Venkatesh col- lected data from prostitutes regarding sexual services rendered as well as data on a number of variables associated with the sex trade in South Chicago. Recognizing that traditional methods of gathering data regarding prostitution have not produced reliable results, he opted for a non-con- ventional method.