Foolish Book Review: "Freakonomics"

Some books make you a better investor by improving your grasp of financial theory, or technical analysis, or macroeconomics. Freakonomics, by rogue economist Steven Levitt and journalist Stephen Dubner, is not one of those books. But that doesn't mean it can't help you invest better. It can -- just in an unconventional way.

As its co-authors admit, this book doesn't have any unifying theme. It's a meandering journey through the hidden truths behind phenomena as diverse as the Ku Klux Klan's insider-information advantage, corruption in the elite sumo-wrestling league, the effect of abortion on crime rates 20 years later, and the impact of campaign money on election outcomes. Among many, many other things.

I won't spoil the fun of Freakonomics by holding up any particular episode above another -- it's a great read, and I strongly encourage you to read it cover-to-cover. Because what this rudderless book does do is open your eyes to how the world really works. And some of the stories do involve real economics, as in these quotes:

  • "All told, the crash of the crack market accounted for roughly 15% of the crime drop of the 1990s -- a substantial factor, to be sure, though it should be noted that crack was responsible for far more than 15% of the crime increase of the 1980s."
  • "The problem is that the [real-estate] agent only stands to personally gain an additional $150 by selling your house for $10,000 more, which isn't much reward for a lot of extra work. So her job is to convince you that a $300,000 offer is in fact a very good offer, even a generous one, and that only a fool would refuse it."

Grand unifying theory
If there's one idea that keeps this sprawling work together, it's the economics of individual incentives, and how those incentives snowball into statistically measurable mass movements. It's a different way of thinking about economics, but once you get used to it, you'll see this kind of small-scale thinking on a massive scale wherever you look, and it will help you understand the business world, too.

In fact, the thinking patterns that Levitt likes to use would make him a great Rule Breakers analyst for us Fools. In that newsletter service, the plan is to find growth stocks that are poised to dominate. That means cutting through the surface clutter and getting to the core of each prospective Breaker organization.

For example, back in 2005, Tim Beyers caught on to the rising global urge to download bandwidth-hungry items such as music, video clips, movies, when Apple's (Nasdaq: AAPL  ) iTunes was but an annoying little thorn in the music industry's side, and YouTube -- now owned by Google (Nasdaq: GOOG  ) -- had yet to make its public debut.

So how do you ride that unseen wave? Through traffic-booster Akamai (Nasdaq: AKAM  ) , that's how. That outside-the-box pick has given our subscribers a 147% return to date, even accounting for the recent price drop. And it's the kind of observation that Levitt disciples might make on their own, applying the lessons they've learned from Freakonomics.

But wait -- there's more!
It gets better. Not content to let a dead tree lie, Levitt and Dubner launched a frequently updated Freakonomics blog, now hosted by New York Times' (NYSE: NYT  ) website for its namesake newspaper. There, you can keep up with the latest whittlings from Levitt's eccentric economist's mind. Recent topics include "Does Sport Cause Crime?" and the common denominators between Freakonomics 2 and Disney's (NYSE: DIS  ) sequel to High School Musical.

Like the book, the blog is always entertaining and often enlightening, and the updated edition of the book that I picked up includes a few nuggets from the online-content stream. Whether you whet your freaky appetite online and then move over to the book, or start on paper and graduate to electrons, it's time well spent, and you'll be smarter for the experience.

And then you can take a free trial pass to Motley Fool Rule Breakers and see where this unusual worldview might take you. The exclusive Rule Breakers message boards -- included in your trial -- make a great place to delve deeper into the rule-breaking mind-set, and its potential rewards. You know, Akamai is far from the best performer on that scorecard ...

Further freaky Foolishness:

Akamai is a Motley Fool Rule Breakers recommendation, and Disney is a Motley Fool Stock Advisor pick. Read all about it with a handful of 30-day trial passes.

Fool contributor Anders Bylund owns shares in Disney and Google but holds no other position in any of the companies discussed here. You can check out Anders' holdings if you like, and Foolish disclosure freaks him out, man.

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