Freakonomics: What Prostitutes Can Teach About Economics

Summary

In this humorous yet insightful story, economist Steven Levitt recounts a conversation with a prostitute who had once been a computer programmer. After discussing pricing strategies, Levitt discovers that, despite her apparent lack of formal economics knowledge, she was making decisions based on market factors, like other women’s rates. When Levitt invites her to guest lecture on the economics of crime, the class is a huge hit, though Levitt is irked when she raises her hourly rate. She credits Levitt for helping her realize her services were worth more, making the price increase her best business decision.

Takeaways

• 😀 The speaker discusses a conversation with a prostitute who has a background in computer programming, shedding light on her business practices and industry understanding.
• 😀 Despite being a highly educated woman who left a high-paying job to pursue prostitution, the speaker points out her lack of pricing strategy and knowledge of economics.
• 😀 The speaker humorously compares pricing strategies in both business and prostitution, highlighting the common challenge of setting prices accurately.
• 😀 The prostitute sets her price by checking what other women are charging, which reflects an informal, non-optimized pricing model.
• 😀 The speaker introduces the concept of local monopolies and pricing optimization, suggesting that the prostitute could improve her pricing strategy by considering demand elasticity.
• 😀 Despite the prostitute’s lack of economic knowledge, the speaker finds that her business practices provide valuable insights for teaching economics.
• 😀 The speaker decides to invite the prostitute to lecture his economics class on the topic of prostitution and crime, offering to pay her hourly wage.
• 😀 The prostitute agrees to give the lecture for her hourly wage, leading to a surprisingly successful guest lecture that many students rate as one of their best.
• 😀 After the lecture, the speaker is frustrated to learn that the prostitute charges more for the lecture ($400) than what he had been paying her ($300), despite their prior arrangement.
• 😀 The prostitute explains that her price increase was a result of the speaker’s influence, as he had convinced her that her services were worth more than what she had been charging, marking the price raise as a successful business decision.

Q & A

What is the main theme of the script?

The main theme revolves around a conversation between an economist and a prostitute, where the economist explores the business side of prostitution, including pricing strategies and market dynamics.

How did the economist meet the woman in the script?

The economist met the woman at brunch, where he began talking to her about business after being approached by numerous CEOs seeking advice after his book, Freakonomics, was published.

What was the woman's background before becoming a prostitute?

The woman was a college-educated individual who had quit her $80,000 per year job as a computer programmer to become a prostitute.

What was the woman's pricing strategy for her services?

The woman set her pricing by researching what other prostitutes were charging online, deciding to charge $300 an hour, which was the average rate she found.

What did the economist think about the woman's pricing strategy?

The economist was critical of her pricing strategy, believing it lacked optimization, as it didn’t follow economic theory related to marginal costs and elasticity of demand.

How did the economist suggest she could optimize her pricing?

The economist suggested that she was a local monopolist and could charge more for her services, as her pricing did not reflect the demand curve, implying there was room to increase her rate.

What was the woman’s reaction when the economist suggested a pricing optimization?

The woman was indifferent to the suggestion and didn’t fully grasp the concept of pricing optimization, as economics wasn’t her area of expertise.

What did the economist do when he needed a lecture on prostitution for his class?

The economist decided to call his new prostitute friend and offer her an opportunity to give a lecture to his class on the subject, paying her hourly wage for the lecture.

How did the students react to the prostitute’s lecture?

The lecture was well-received, with a third of the students stating it was the best lecture they had heard during their four years at the University of Chicago.

Why did the economist become upset during the Q&A session of the lecture?

The economist became upset because the prostitute charged $400 an hour for her lecture, which was more than the $300 per hour she had previously told him, and he was paying out of his own pocket.

How did the prostitute justify raising her prices?

The prostitute justified raising her prices by explaining that the economist had convinced her that her services were worth more than she was charging, and the decision to raise her price to $400 had been a very successful business move.