Introducing "Applied Freakonomics"

When blog reader Kyle contacted us with his story of how thinking “freakonomically” first netted — then lost — him significant amounts of incremental income, we had what we’d call an “aha moment,” if Oprah hadn’t apparently patented that phrase.

Here’s Kyle’s story — and if you have a tale of “applied Freakonomics,” we’d love to hear it, too, and possibly feature it on the blog.

Applied Freakonomics: Working on the Night Moves

Kyle is a social worker in a small Midwestern city. His clients are people with serious and long-term psychological disorders, and his job is to help them function as smoothly — and inexpensively — as possible in the community.

One thing his clients like to do is go to the emergency rooms of hospitals at night, and the cost to the county over time is astronomical, if they end up being admitted. In order to keep unnecessary hospital admissions to a minimum, Kyle and his co-workers are assigned to a nightly on-call rotation.

Five years ago, Kyle had just finished reading Freakonomics, and it lit a fire under him. “Immediately after finishing the book,” Kyle wrote, “I wondered how I might use its principles to enhance my life.” Kyle decided to approach his co-workers to see if any of them would be interested in ceding him their overnight shifts, which at the time paid $3.50 per hour.

“The shifts were unpopular, as you often had to go out in the middle of the night (which was awful during the winter), but I, being a single guy and needing money, didn’t mind it as much,” Kyle wrote.

It turned out that the shifts were unpopular, indeed — so unpopular that as soon as Kyle broached the topic, six of his seven co-workers turned their on-calls over to him.

“One person, a rival of mine, kept his and occasionally would negotiate for some of the open shifts,” Kyle wrote, “but he did not have the passion I had for this exercise. So, overnight, I had increased my income by thousands. After three years of earning in the low $40,000 range, I finished that first year at $60,000 in earnings.”

Thinking “freakonomically” again, Kyle decided to streamline the on-call system. Kyle worked to establish strong relationships with local hospital staffs, and as they came to know and trust him, many of the dreaded middle-of-the-night call-outs to retrieve a client were avoided; doctors and nurses were willing to allow certain clients to sit quietly in a corner of the hospital, knowing that Kyle would arrive in a county car at eight in the morning to pick them up and take them home.

Kyle couldn’t believe his good fortune — he had commandeered seven out of every eight night shifts, the on-calls had become far less arduous, and his income had skyrocketed. And then something amazing happened: the administration announced it was raising the on-call rate from $3.50 per hour to $100 a night.

“At first, I thought, The biscuit wheels have fallen off the gravy train,” Kyle wrote, because he assumed the tripled pay rate would cause his co-workers to reclaim their shifts. Kyle practically tiptoed through the halls at work — and checked his emailbox with a feeling of dread — but to his amazement, there was absolutely no response to the rate increase. “My co-workers had gotten so used to having every evening free that even the wage increase would not bring them back. It was like there was an ATM machine at work just spitting out bills, and nobody wanted them.”

Confidence restored, Kyle asked himself, How can Freakonomics take me further? It occurred to him that paperwork was the bane of the social worker’s existence, and Kyle, being younger and more computer savvy than his co-workers, was actually pretty adept at this type of task. He drew up a small menu of the paperwork services he was willing to perform for very reasonable prices.

To his delight, four of his co-workers took him up on his new offer. And this is where, as Kyle puts it “the Law of Unintended Consequences got me.”

Because in order to finance Kyle’s minuscule paperwork fees, all four of those workers re-entered the on-call rotation. At first they just reclaimed a shift here or there, but “once they realized how streamlined on-call had become, and once they got their paychecks and experienced firsthand the benefit of the tripled rate, they re-entered the on-call rotation at the frequency before all this began.”

So as quickly as that, Kyle’s incremental revenue stream — which had flowed steady and strong for over five years — became a sickly trickle, which is where the situation stands today.

Kyle — who likens himself to such classic over-reachers as Icarus and Aesop‘s dog-with-a-bone — has given a lot of thought to why his small paperwork fees so dramatically altered the behavior of his co-workers. In a phone interview he explained, “It didn’t cost them anything to give up a shift, but I was charging them to do the paperwork, and I think that was my error. If I took their money before they actually got it, they didn’t notice it because it never came to them. Once the cash was already in their pockets, well, now they’re noticing it was gone.”

Kyle believes he could have avoided his mistake if he’d paid closer attention to the time-tested methodology of another salary-reducing entity: income tax. “It’s very similar to what the government does with paychecks,” Kyle observes. “If you take it out before they ever see it, they never even know it was theirs.”

While he mourns the loss of tens of thousands of dollars in annual incremental income, a wiser, warier Kyle remains hopeful. “Reading the first Freakonomics book easily added a solid $100,000 to my income over the last four years. I hope I will find a nugget of wisdom in Superfreakonomics that will help me repeat the experience in a more clever way, which I will practice with much greater restraint.”


C. R. Turang

The "Aha moment" perhaps goes back to pre-Oprah days. See the article on Martin Gardener in Wikipedia.

q

Isn't there a fairy tale about this? Something like greed killing the golden goose?

Dan

sounds like he was reading "Nudge" instead of Freakonomics

Dan K

As clever as this guy is, he must be a very committed public servant to do that job at all.

I'm also surprised his supervisors didn't stop this work swapping. I would think it would be against some regulation or another.

Kevin

Interestingly, this story also provided an example of the income effect vs. substitution effect conundrum. Wage is essentially a price for leisure and anytime wages get increased its difficult to predict if workers will work more to get more income or work the same amount of hours (or less) because of the fact they can make comparable income with less time invested in working. Here the workers decided the pay increase wasn't worth the value of free nights. However, the fact that they weren't working the night shifts at the time of the wage increase is an intriguing wrinkle that may indicate this isn't a perfect example of the substitution effect.

Mat

In what sense is taking on extra work for extra income, reducing one's workload through efficiency gains, or charging fees for goods and services "thinking Freakonomically"? It sounds like the normal behavior of a rational market actor to me.

Justin

@Dan - I was thinking similarly, although his work behavior sounded more like it came out of "Four Hour Work Week."

In a sense, "Freakonomics" is about applying rigorous thinking traditionally reserved for "proper" subjects, like finance or national debt, to less traditional (and more interesting) inquiries. It also seeks to eschew traditional wisdom and take a fresh perspective on a situation or condition. I see how Kyle used some economic principles to better his own monetary situation in a fairly unique way, so I suppose he could be considered to be thinking "Freakonomically." On the other hand, there is hardly anything groundbreaking about picking up extra shifts nobody else wants to earn some extra cash. The paperwork idea is a little more unusual, but that is where he failed. An interesting case study ... even if only to generate discussion about what does or does not qualify as thinking "Freakonomically."

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Avi Rappoport

$3.50 per hour? How can that possibly be?

Gale

Mat, the efficiency gains reduced his workload from when he first took the extra shifts to when he optimized the process. It wasn't a comparison to before he took on the extra work.

And being a rational market actor isn't the natural state, it requires information, which Kyle obtained while his co-workers didn't. i'm left wondering why his employers didn't notice the efficiency gains and reduce the incentive (or headcount).

Jenna Puckett

This should be your next book!

Josh Marinacci

His $3.50 was tripled to $100 per hour? I think there's a decimal off in one of those numbers.

Josh

The 3.50 is to be on call. He was not working during the night.

Mitch

Frankly, I'm surprised Kyle's coworkers weren't downsized given the apparent efficiency gains that could be realized.

Marisa

Josh (#11): His $3.50 per hour was changed to $100 PER NIGHT. If he was paid for 16 hours on-call, it doubled his nightly pay.

Eric A

How is that related to Freakonomics at all? He basically used common sense to take advantage of his stupid co-workers.

Isaac

I think it is considered "Freakonomics" because it is counterintuitive in a certain respect. The same people who are cavalier about ignoring $100/night will not pay $5 to avoid an aspect of their job they hate just as much.

Yes, when you break it down, it is fundamental free market economics. But so are many of the stories in "Freakonomics"! It's not as exciting as prostitutes and sumo wrestlers, but it all gets distilled back down to Adam Smith in the end.

Oh, and to the people who are surprised that the administration didn't adjust to his efficiency gains, need you be reminded that social workers work for the government? He is a rogue capitalist in a county or state bureaucracy. The real mystery is why he's in that field at all and not earning six figures elsewhere.

Joe Smith

"He basically used common sense to take advantage of his stupid co-workers."

They knew exactly what trade-off they were making. There was no advantage taking. I do not think very many people would be willing to take $3.50 per hour to be on call overnight to go and deal with mentally disturbed people.

JBK

There should be an entire book of applied Freakonomics. Since writing the books takes years of research, it would be a great way to tide us over for the next one.

Don

"How is that related to Freakonomics at all? He basically used common sense to take advantage of his stupid co-workers."

Eric,

Have you read Freakonomics?

Louie

Good chap! That was quite a story. I hope it encourages others to be more thrifty amid the crises we face. I'm from the Philippines and I can say that here life gets hard too, but for that reason even more people might be willing to take extra-shifts than those willing to give these up.

Continue finding ways to do things better, and inspiring others along the way!

Louie Montesclaros