Summary of The Tipping Point

The Tipping Point investigates the processes and mechanisms by which some trends achieve exponential popularity while others sputter and fail to gain traction. Gladwell’s central argument is that there are actually a number of patterns and factors that are at play in virtually every influential trend, ranging from the spread of communicable diseases to the unprecedented popularity of a particular children’s television show. If you analyze the evolution of any major phenomenon, the author suggests, you will find that the processes involved are strikingly similar.

Based on his in-depth research spanning a number of different fields, industries, and scholarly disciplines, Gladwell identifies three key factors that each play in role in determining whether a particular trend will “tip” into wide-scale popularity. Gladwell’s discussion and illustration of the concepts of the Law of the Few, the Stickiness Factor, and the Power of Context comprise the majority of the book.

• "The Law of the Few", or, as Gladwell states, "The success of any kind of social epidemic is heavily dependent on the involvement of people with a particular and rare set of social gifts." According to Gladwell, economists call this the "80/20 Principle, which is the idea that in any situation roughly 80 percent of the 'work' will be done by 20 percent of the participants." These people are described in the following ways:
• Connectors are the people who "link us up with the world ... people with a special gift for bringing the world together." They are "a handful of people with a truly extraordinary knack for making friends and acquaintances". He characterizes these individuals as having social networks of over one hundred people. To illustrate, Gladwell cites the following examples: the midnight ride of Paul Revere, Milgram's experiments in the small world problem, the "Six Degrees of Kevin Bacon" trivia game, Dallas businessman Roger Horchow, and Chicagoan Lois Weisberg, a person who understands the concept of the weak tie. Gladwell attributes the social success of Connectors to "their ability to span many different worlds as a function of something intrinsic to their personality, some combination of curiosity, self-confidence, sociability, and energy."
• Mavens are "information specialists", or "people we rely upon to connect us with new information." They accumulate knowledge, especially about the marketplace, and know how to share it with others. Gladwell cites Mark Alpert as a prototypical Maven who is "almost pathologically helpful", further adding, "he can't help himself". In this vein, Alpert himself concedes, "A Maven is someone who wants to solve other people's problems, generally by solving his own". According to Gladwell, Mavens start "word-of-mouth epidemics" due to their knowledge, social skills, and ability to communicate. As Gladwell states, "Mavens are really information brokers, sharing and trading what they know".
• Salesmen are "persuaders", charismatic people with powerful negotiation skills. They tend to have an indefinable trait that goes beyond what they say, which makes others want to agree with them. Gladwell's examples include California businessman Tom Gau and news anchor Peter Jennings, and he cites several studies about the persuasive implications of non-verbal cues, including a headphone nod study (conducted by Gary Wells of the University of Alberta and Richard Petty of the University of Missouri) and William Condon's cultural microrhythms study.
• The Stickiness Factor, the specific content of a message that renders its impact memorable. Popular children's television programs such as Sesame Street and Blue's Clues pioneered the properties of the stickiness factor, thus enhancing the effective retention of the educational content in tandem with its entertainment value.
• The Power of Context: Human behavior is sensitive to and strongly influenced by its environment. As Gladwell says, "Epidemics are sensitive to the conditions and circumstances of the times and places in which they occur." For example, "zero tolerance" efforts to combat minor crimes such as fare-beating and vandalism on the New York subway led to a decline in more violent crimes city-wide. Gladwell describes the bystander effect, and explains how Dunbar's number plays into the tipping point, using Rebecca Wells' novel Divine Secrets of the Ya-Ya Sisterhood, evangelist John Wesley, and the high-tech firm W. L. Gore and Associates. Gladwell also discusses what he dubs the rule of 150, which states that the optimal number of individuals in a society that someone can have real social relationships with is 150.

After identifying and describing these key concepts, Gladwell dedicates the remainder of the book to illustrating them and their interdependency in a series of compelling case studies and examples. An afterword included in the newest edition of the book updates some of Gladwell’s arguments for more pertinent application in an era of widespread Internet connectivity.

Chapter 1: The Three Rules of Epidemics

Gladwell asserts that most trends, styles, and phenomena are born and spread according to routes of transmission and conveyance that are strikingly similar. In most of these scenarios, whether the event in question is the spread of syphilis in Baltimore’s mean streets or the sudden spike in the popularity of Hush Puppies sales, there is a crucial juncture, which Gladwell terms the “tipping point,” that signals a key moment of crystallization that unifies isolated events into a significant trend. What factors decide whether a particular trend or pattern will take hold? Gladwell introduces three variables that determine whether and when the tipping point will be achieved.

The three “rules of epidemics” that Gladwell identifies are: the Law of the Few, the Stickiness Factor, and the Power of Context. He concludes the chapter with a preliminary discussion of the Law of the Few, noting that the origins of most major epidemics of sexually transmitted diseases can be traced back to the disproportionate influence of a few “super infectors” who are personally responsible for dozens, or in some cases, hundreds of transmissions. This role is analogous to the category of people that Gladwell identifies as “Connectors,” who play an inordinate role in helping new trends begin to “tip,” or spread rapidly.

Chapter 2: The Law of the Few: Connectors, Mavens, and Salesmen

The attainment of the tipping point that transforms a phenomenon into an influential trend usually requires the intervention of a number of influential types of people. In the disease epidemic model Gladwell introduced in Chapter 1, he demonstrated that many outbreaks could be traced back to a small group of infectors. Likewise, on the path toward the tipping point, many trends are ushered into popularity by small groups of individuals that can be classified as Connectors, Mavens, and Salesmen.

Connectors are individuals who have ties in many different realms and act as conduits between them, helping to engender connections, relationships, and “cross-fertilization” that otherwise might not have ever occurred. Mavens are people who have a strong compulsion to help other consumers by helping them make informed decisions. Salesmen are people whose unusual charisma allows them to be extremely persuasive in inducing others’ buying decisions and behaviors. Gladwell identifies a number of examples of past trends and events that hinged on the influence and involvement of Connectors, Mavens, and Salesmen at key moments in their development.

Chapter 3: The Stickiness Factor: Sesame Street, Blue’s Clues, and the Educational Virus

Another crucial factor that plays a key role in determining whether a trend will attain exponential popularity is what Gladwell terms “the stickiness factor.” This refers to a unique quality that compels the phenomenon to “stick” in the minds of the public and influence their future behavior.

An interesting element of stickiness, as defined by Gladwell, is the fact that it is often counterintuitive, or contradictory to the prevailing conventional wisdom. To illustrate this point, Gladwell undertakes an in-depth discussion of the evolution of children’s television between the 1960s and the 2000s.

The PBS show Sesame Street represented a vast improvement in the “stickiness” of children’s television, in large part because it turned many of the long-established assumptions about children’s cognitive abilities and television-watching behaviors on their heads. These changes, based in large part on extensive research, resulted in a show that actually helped toddlers and preschoolers develop literacy.

Years later, the television show Blue’s Clues applied many of these same techniques to Sesame Street itself, resulting in the development of a program that research has shown can generate significant improvements in children’s logic and reasoning abilities. The attribute of stickiness, Gladwell argues, often represents a dramatic divergence from the conventional wisdom of the era.

Chapter 4: The Power of Context (Part One): Bernie Goetz and the Rise and Fall of New York City Crime

Another crucial aspect of the complex processes and mechanisms that cause trends to “tip” into mass popularity is what Gladwell terms the Power of Context. If the environment or historical moment in which a trend is introduced is not right, it is not as likely that the tipping point will be attained. To illustrate the power of context, Gladwell takes on the strangely rapid decline in violent crime rates that occurred in the 1990s in New York City.

Although Gladwell acknowledges that a wide variety of complex factors and variables likely played a role in sparking the decline, he argues convincingly that it was a few small but influential changes in the environment of the city that allowed these factors to tip into a major reduction in crime. He cites the fact that a number of New York City agencies began to make decisions based on the Broken Windows theory, which held that minor, unchecked signs of deterioration in a neighborhood or community could, over time, result in major declines in the quality of living.

To reverse these trends, city authorities started focusing on seemingly small goals like painting over graffiti, cracking down on subway toll skippers, and dissuading public acts of degeneracy. Gladwell contends that these changes in the environment allowed the other factors, like the decline in crack cocaine use and the aging of the population, to gradually tip into a major decline in the crime rate in the city.

Chapter 5: The Power of Context (Part Two): The Magic Number One Hundred and Fifty

Clearly, in order for a trend to tip into massive popularity, large numbers of people need to embrace it. However, Gladwell points out that groups of certain sizes and certain types can often be uniquely conducive to achieving the tipping point. He traces the path of the novel The Divine Secrets of the Ya-Ya Sisterhood from regional cult favorite to national best-seller.

Gladwell notes that the unique content of the novel appealed strongly to reading groups of middle-aged women in Northern California, and that these women were uniquely well-positioned to catapult the book to national success as a result of an informal campaign of recommendations and advocacy.

Gladwell also remarks upon the unusual properties tied to the size of social groups. Groups of less than 150 members usually display a level of intimacy, interdependency, and efficiency that begins to dissipate markedly as soon as the group’s size increases over 150. This concept has been exploited by a number of corporations that use it as the foundation of their organizational structures and marketing campaigns.

Chapter 6: Case Study: Rumors, Sneakers, and the Power of Translation

In this case study-oriented chapter, Gladwell discusses the rise and decline of Airwalk shoes. The brand was originally geared towards the skateboarding subculture of Southern California, but sought to transcend this niche market and attain national name recognition. They succeeded in this endeavor with the help of an advertising agency with a unique understanding of the factors and variables that influence the public’s perception of "coolness." The marketing campaign ruthlessly honed in on and exploited several timely avatars of coolness, such as Tibetan Buddhism, pachuco gang culture, and hipsters’ ironic embrace of preppy culture, rendering Airwalk shoes cool by association in the process.

The company’s unique strategy of offering unique products to boutique stores and a more mainstream shoe selection to department stores had long kept both cutting-edge hipsters and their more mainstream, impressionable counterparts content. However, as a cost-cutting measure, Airwalk eventually began providing all of its distributors with a single line of shoes. The delicate balance that had long rendered the company’s products cool in the minds of the public was disturbed, and sales declined significantly.

Chapter 7: Case Study: Suicide, Smoking, and the Search for the Unsticky Cigarette

In another case study, Gladwell discusses the relationship between a sudden, alarming rise in suicide among adolescent males in Micronesia and the persistent problem of teen cigarette use in the United States. In both instances, teens were induced to become involved in potentially lethal experimentation. Gladwell asserts that both trends were predicated upon two main factors.

First, teenagers are inherently, perhaps even genetically predisposed to imitate others and try on new behaviors and attitudes during adolescence. Second, the types of the people who are more likely to engage in dramatic, easily romanticized behavior such as early cigarette smoking or suicide are also more likely to be those that others tend to gravitate toward and seek to emulate.

Gladwell also considers the origins and implications of the curiously large middle ground that exists between those who abstain altogether from potentially dangerous activities, and those who engage in them in a consistently low-level manner. In terms of cigarette use, these “chippers” typically never smoke enough to tip into full-blown addiction, and thus escape most of the ill effects of long-term tobacco use. Gladwell suggests that infrequent teenage experimentation with drugs or smoking should not be regarded with hysteria, but rather, should be accepted as inevitable and is, in all likelihood, benign.

Chapter 8: Conclusion: Focus, Test, Believe

In this chapter, Gladwell concludes with an account of the type of solution that reflects an understanding of the concept of the tipping point: A nurse seeking an effective, low-cost way to raise breast cancer awareness among African-American women shunned traditional routes and enlisted the help of hairstylists. In this environment, she reasoned, most people are relaxed and receptive to new information in a way that most education efforts can’t duplicate. Gladwell acknowledges that this type of thinking is often derided as being a “band-aid” solution that treats symptoms, rather than underlying problems. However, he asserts that these solutions are often the very type of cumulative, low-key approach that can, over time, build to a tipping point of massive popularity and influence.

Summary of The Black Swan

Key Points

• Predicting the future is, in many cases, impossible.
  
• People significantly underestimate the significance of extreme events when considering the future. “Black Swans” are these extreme events.
  
• There is a tendency to give explanations to largely random successes or failures after the fact.

Summary

The idea of the black swan refers to the fact that, prior to the discovery of Australia, it was assumed that all swans were white, because no one (well, no European at least) had ever seen a black swan. However, they do exist.

However, in the book, a “black swan” refers to any event that is rare, has an extreme impact, and is explainable and predictable - but only in hindsight.

In this book, Nassim Nicholas Taleb argues several major points:

• Rare events occur much more often than we expect. Our minds are programmed to deal with what we’ve seen before, to “expect the expected”, so to speak. However, all too often extreme events do indeed take place, and have large, and long lasting effects.
  
• Our tendency to discard rare events happens in part because people underestimate their ignorance. There is a great deal we don’t know, but since feeling ignorant isn’t pleasant, we tend to put it out of our minds.
  
• We tend to invent stories where there are none. In other words, after the fact, we like to invent explanations for why things happened the way they did, which is much more comforting than staring at sheer randomness.

Summary of Good to Great

Key Points

• “Level 5 Leaders” - leaders who have both “personal humility” and “professional will”. These are not rock-star leaders whose companies go into decline when they move on. They are diligent and hard working - more bite than bark. Celebrity leaders often work for a time, but appear to be damaging in the long run, because they don’t create sustained results.
  
• Get the right people on the bus - that has to happen before the “what” decisions are taken. That can change if you have the right people, but the wrong people will certainly make the enterprise fail.
  
• You must always be willing to “confront the brutal facts”. Don’t ignore reality in favor of what your hopes reflect it to become. Only by having accurate information can you achieve success.
  
• The “Hedgehog concept” means having a simple, extremely clear concept of what their business is. That business is something they can 1) make money at, 2) be passionate about, and 3) be the best in the world at.
  
• A culture of self-discipline is critical, because it creates an environment where people work within a defined system, and yet, because the confines of the system are known, gives them more freedom to act within that system.
  
• Technology is an accelerator, not an agent of change. Good companies use it to execute better, but it won’t save a mediocre company.
  
• “The Flywheel” refers to the idea of momentum - keep pushing in one direction and you’ll build up a lot of it that will help you to overcome obstacles. Momentum is built a little bit at a time - it’s not a dramatic, revolutionary change, but constant, diligent work.

Summary

The idea that sparked this book was to answer questions about how good companies might become great companies, and how they went about doing so.

Methodology

The study looks at companies from 1965 to 1995, looking for those that, for 15 years, either tracked or underperformed the stock market, followed by a transition, and subsequently returning at least 3 times the stock market for at least 15 years. The goal was to eliminate “flash in the pan” success from the results. Further filtering was performed in order to ensure that companies also outperformed their industries, so as not to include spurious results showing entire industries that grew by leaps and bounds in a given period. Eleven companies were located that matched these criteria, and were studied in depth, and compared to competitors in their fields

The companies studied were:

• Abbot Laboratories
• Circuit City
• Fannie Mae
• Gillette
• Kimberly-Clark
• Kroger
• Nucor
• Philip Morris
• Pitney Bowes
• Walgreens
• Wells Fargo

Level 5 Leaders

All the companies studied had what Collins describes as “Level 5 Leaders”. Despite sounding like something from a space-alien worshiping cult, what the term refers to is an individual who is very humble on a personal level, but who possesses a great deal of drive and desire to succeed, where “success” is not personal, but defined by creating something great that will outlast their time at the helm. These are people with an unwavering will and commitment to do what is necessary to drive their organization to the top. Most of the good to great executives discussed luck as an important factor in their success [and perhaps cynical readers of The Black Swan will agree with that assessment more than the factors Collins cites - davidw]. Level 5 leaders, are, in any case, the kind of people who do not point to themselves as the cause for an organization’s success. The chapter closes with a discussion of whether Level 5 Leaders are born, or made, with the conclusion that many people probably have the kernel of abilities and attitude necessary to attain that status.

First Who … Then What

During the transformation from good to great, rather than concern themselves first with the “what” - products, direction, strategy - the companies studied ensured they had the right people “on the bus” before anything else. By having a strong team, these companies avoided the pitfall of the “lone genius” CEO. For example, think what would happen to Apple’s share price were something to happen to Steve Jobs. “Great” companies are those that have a very solid foundation, and don’t depend on the brilliance of any one person.

The research indicated that compensation did not correlate at all with the “good to great” process. No particular compensation scheme appeared to be advantageous.

Also important was that, while the companies were “tough” places to work, they were because of the general high quality and hard-working mindset, not because of ruthless management. Some practical tips for how to be rigorous:

• Don’t hire someone unless you’re 100% sure that they’re the right person. It’s better to wait and get someone that you know is a good fit.
  
• Once you realize you need to fire someone, don’t put it off. Do it quickly and fairly, but do it and be done with it, rather than put it off.
  
• Give good people good opportunities, rather than the biggest problems. Fixing problems makes you good, but taking advantage of the right opportunities can make you great.

Good to great teams were mostly composed of people who had a good sense of balance with the rest of their lives - family, church, and so on. Of course, they had a deep commitment to their companies, but not one that blinded them to the other important things in their lives.

Confront the Brutal Facts

One of the key factors in the success of the great companies was a series of good decisions. The good decisions flowed from the fact that they all made a consistent and thorough effort to confront reality, internalizing the facts relevant to their market. Having lofty goals can be good, but you can never lose sight of what the reality is on the ground, no matter how much you will it to be different.

In a large organization, where it’s impossible to personally poke your nose in all corners of the company every day, it is crucial to create a climate where honesty is valued and honored. If people aren’t telling it like it is, those at the top may not realize the truth until too late. Some tips to create this kind of climate:

• It’s often better to ask questions rather than dispense “answers”.
  
• Encourage healthy debate. It has to be real debate, not a show put on to make people feel included. It should also not just be argument for the sake of argument - reach a conclusion and move on.
  
• When things go wrong, investigate to avoid repeating the mistake, instead of assigning blame. If people are too worried about protecting themselves, it becomes difficult to honestly analyze and learn from failures.
  
• Create mechanisms, “red flags” that allow people to communicate problems instantly and without repercussions, and in a way that cannot be ignored.

Amidst these “brutal facts” that must be faced, you must also have faith in your final goal. By maintaining this vision, and keeping your ear to the ground, it won’t be necessary to motivate people - if you’ve got the right people, they’ll be motivated of their own accord.

The Hedgehog Concept

The “hedgehog concept” refers to a parable of a hedgehog and a fox, where the fox knows many things, but the hedgehog knows one big thing. The good to great companies were by and large built by “hedgehogs” - this doesn’t mean stupid - au contraire - it just means that they were able to focus on one big important thing that made their companies great. Sometimes it takes real genius to see through all the clutter and grab the one, simple, unique thing that gives you the advantage.

The “three circles” is an idea regarding how to find your “hedgehog concept”: think of three interlocking circles, representing 1) what you are passionate about, 2) what you can make money at, and 3) what can you be the best at. At the intersection of these three things lies the winning target. If you can bring all three things to bear, you have found a way to excel. Learn to realize, as well, what you will never be the best at - those are things you must avoid, if possible. The economics of various industries varied widely, but the good great companies were winners, even within industries that weren’t rising stars. One consistent rule of thumb is to identify a ratio, profit per X, (where X could be customer, web site user, per unit sold, per employee etc…) and focus on that. Sometimes it may not be obvious.

Passion, on the other hand, does not come from executive rah-rah sessions with employees, but by doing things that make people passionate on their own. Passion isn’t something that can be forced on people, it has to come from a mission that they truly believe in, that’s more than just a paycheck.

Another practical suggestion is to create a “Council”, of between 5 to 12 people, to discuss and gain insights into the organization. It should meet regularly, not a one-time group. Its members should bring to the table a deep understanding of some portion of the firm. They need to freedom to speak their minds, and always have the respect of the other Council members. The Council exists to help the chief executive, not reach a consensus. It is an informal group, in the sense that it is not spelled out in official documents or org charts.

Culture of Discipline

Great companies have both an entrepreneurial spirit and a sense of discipline. They are both necessary - without the drive to try new things, and some degree of independence, a company becomes a rigid, stifling hierarchy. Without some sense of discipline, things begin to break down as the company grows. The best companies have both latitude for individual action, as well as a culture of disciplined behavior. This begins, once again, with the right people. It’s useless trying to create rules to force the wrong people to behave correctly - it simply won’t work. Instead, you need to find people who have an innate sense of self-discipline that doesn’t come from above. There is a big difference between having a “tyrant” that enforces a culture of discipline by fear, and finding people who naturally adhere to a disciplined approach. The former will disintegrate when the leader moves on, the latter creates a lasting system.

One helpful approach to discipline is to have a “stop doing” list. Stop doing the things that aren’t central to your business. Stop doing the things that are just clutter, but even more importantly, stop doing even things that might be seen as important, if they are not in your “three circles”.

Technology

“Great companies adapt and endure” - technology is not a differentiator in and of itself, but rather something that enhances great companies. They use it to further increase their leverage, in a conscious, directed way, rather than rushing to embrace it for the sake of its newness. Technology won’t light a fire where there is none, but where there is already good momentum, judicious use of technology can help accelerate it. Technology is an enabler of change, not the cause of it - but the “people factors” must be in place before application of technology will do any good. Technology as a reaction - to the latest fashion, to the competition - was not what was found in great companies. These companies possess a drive all their own that pushes them to be the best in their chosen field, and picking the right technology is a natural part of that.

The “Flywheel” and “Doom Loop”

These two concepts represent positive and negative momentum. A flywheel is a heavy wheel that takes a lot of energy to set in motion - to do so usually requires constant, steady work, rather than a quick acceleration. Great companies’ transformations were like this as well. There was no magic recipe or no ‘aha’ moment when everything changed. Rather, with everything in place, lots of hard work slowly but steadily got the great companies going faster and faster, with a lot of momentum. Once it’s in motion, all that stored energy tends to keep it moving in the right direction.

Conversely, the “doom loop” is the vicious circle that unsuccessful companies fall into, rushing first in one direction, then another, in the hope of creating a sudden, sharp break with the past that will propel them to success. Some attempt to do this through acquisitions, others through bringing in a new leader who decides to change direction completely, in a direction incompatible with the company. The results are never good. The difference between the two approaches is characterized by the slow, steady, methodical preperation inherent in the flywheel, as compared to the abrupt, radical, and often revolutionary, rather than evolutionary changes within the company.

Built to Last

The results from this book were obtained without regards to Collins’ earlier work, Built to Last, but when all was said and done, Good to Great is what has to happen before a company becomes Built to Last. Much of what is present in Good to Great was present during the creation by their founders of the Built to Last firms. Companies that have endured have a raison d’être beyond simply making money - they have distinguishing and unique characteristics, goals and ways of operating that go beyond a simple desire to make money. These core values are preserved, while tactics change continuously to deal with an restless, tumultuous world that never stops.

The “Big Hairy Audacious Goal”, a concept introduced in Built to Last can be either good (as motivation, something to pursue), or bad (if it’s impossible or a bad fit). Good BHAGs are those formulated from a deep understanding, whereas bad ones come from brash recklessness without regard for the actual values and capabilities of the company.

Why greatness?

Because it’s not really that much harder to be great than good, and if you’re not motivated to greatness, perhaps you should consider doing something else where you are.

Summary of Freakonomics

Introduction: The Hidden Side of Everything

In this introductory chapter, co-author Stephen Dubner offers an overview of the diverse and seemingly unrelated topics that renowned economist and co-author Steven Levitt has addressed in his body of research. The authors state that there is no unifying theme of the book, although the aim throughout is to explore the hidden side of things and the subtle relationships that link everyday phenomena.


The book is based on four fundamental ideas:

• Incentives are the cornerstone of modern life.
• Conventional wisdom is often wrong.
• Dramatic effects often have distant, even subtle, causes.
• "Experts" use their informational advantage to serve their own interests.

The rest of the book is a series of examples, summarized below.

Chapter 1: What Do Schoolteachers and Sumo Wrestlers Have in Common?

The authors define the study of economics as the study of incentives. How do we profit by the things that we do? And what incentives are so attractive that they compel us to act unethically in order to attain them? Levitt describes the series of research processes that he used to identify a number of Chicago public school teachers who cheated or helped their students cheat on standardized tests. He analyzed standardized test answer patterns and identified suspicious blocks of correct answers, also comparing test scores to students’ past academic performance. Eventually, a controlled retest was administered to identify cheating teachers with greater precision. The findings resulted in the termination of the boldest offenders, as well as reforms in the school system’s standardized testing procedures.

Another of Levitt’s research projects involved the analysis of the scores and bout records of Japan’s elite-level sumo wrestlers. Although allegations of cheating are rampant in the sport, no definitive proof had ever been garnered, as the techniques that are suspected to be used are very subtle. By analyzing and comparing the performances of the wrestlers in matches with vastly different stakes and potential consequences, Levitt determined that cheating does often occur in the sport.

The story of an entrepreneur who sold bagels using the honor system to office workers in Washington, D.C. concludes the chapter. The owner/operator kept detailed financial records, and by analyzing them, Levitt was able to discern a number of remarkably consistent patterns in the behavior of those who took bagels without paying for them. In this story, Levitt demonstrates that cheating, like almost everything else that involves incentives, can be predicted.

Chapter 2: How is the Ku Klux Klan like a Group of Real-Estate Agents?

The authors assert that information asymmetry is one of the most powerful economic tools. Entire industries have flourished and many significant historical events have transpired as the result of an imbalance in the flow of information. In keeping with this theory, the authors offer the story of a man who helped cripple the racist Ku Klux Klan simply by widely disseminating their secrets.

Stetson Kennedy infiltrated the group in the World War II-era and systematically documented the secret rituals and codes of the organization. Kennedy then supplied the records to Hollywood writers, who used the information to create a long-running story arc on the wildly popular Superman radio serial. Children across the United States imitated the shows in their schoolyard games, and gradually, the mystery, grandeur, and influence of the group were profoundly diminished.

The authors relate a number of other instances of information asymmetry being used as an economic tool, including, most prominently, the practices of real estate agencies. By analyzing data about real estate agents common practices when they are selling their own houses, Levitt discovered that they may not always have their clients’ best interests at heart. The Internet, the authors note, has prompted a massive shift in many industries simply by providing consumers with more information than they have ever readily had access to. Other examples of information asymmetry and resulting misjudgments are explored in the behaviors of game show contestants and users of Internet dating services.

Chapter 3: Why Do Drug Dealers Still Live with Their Moms?

This chapter offers a detailed glimpse into the economics of a drug-dealing street gang. The authors follow the research efforts of sociologist Sudhir Venkatesh, whose years conducting field studies in the housing projects of Chicago granted him unprecedented access to the inner workings of the gang. Venkatesh befriended many of his research subjects, one of whom gave him several years of financial records kept by the gang, which Venkatesh later provided to Levitt.

With extensive analysis of the data, Levitt was able to debunk the common perception that crack dealers are all very wealthy individuals. He found that although a few participants profit mightily from their involvement, these are usually the higher-ups who lead the organization, rather than the large numbers of street dealers who form the lower ranks of the group. Levitt compares the organizational structure of the gang to McDonalds, in which a comparatively few executives and managers prosper from the labor of thousands of low-wage workers. This comparison proved to be particularly apt when he found that most street dealers made less than minimum wage, while also bearing a 1-in-4 risk of death.

The authors relate the rise of crack in inner-city America to the historical crime pattern in the country and the social progress of the African American community. The chapter ends with an overview of the wave of violent crime that gripped the country in the early 1990s, and then began a mysterious and rapid decline.

Chapter 4: Where Have All the Criminals Gone?

In this chapter, the authors set forth the controversial claim that has generated more attention than any other aspect of the book: Levitt’s research has suggested that the 1973 legalization of abortion was the cause of the dramatic decline in violent crime that had become apparent by the mid-1990s. Recognizing the volatility of this argument, the authors approach it from numerous perspectives, methodically challenging and undermining all of the most common theories that have been advanced to explain the sudden crime drop. In a detailed analysis, they demonstrate that factors such as improved policing strategies, new prisons, diminished drug demand, an aging population, stricter gun control, a strong economy, and a number of other possible explanations simply do not correlate with the available crime data.

The authors note a number of variables that are strongly correlated with criminality, such as poverty or an unstable family environment, are also likely to be the same reasons that compel pregnant young women to seek abortions. Levitt’s research suggests that the drop in violent crime in the United States occurred at the same time that the first wave of babies conceived after the legalization of abortion were entering late adolescence. Presumably, many of the additional 1.6 million children who would have been born annually if abortion had remained illegal would have been at high risk for engaging in violent crime. Although the authors refrain from taking an ideological stance on the issue, they do conclude that women with the right to choose abortion tend to make good decisions, based on the crime data.

Chapter 5: What Makes a Perfect Parent?

Several years before Freakonomics was published, author Steven Levitt lost his infant son Andrew to a sudden, fatal bout of pneumococcal meningitis. In the aftermath of this tragedy, Levitt and his wife became active in several support groups for bereaved parents. Even as he sought help and guidance for the terrible loss, Levitt noticed the disproportionate number of parents in the groups whose children had drowned in backyard swimming pools. This prompted him to research the issue, as well as a number of other aspects of parenting, from an economic point of view. His research uncovered the high risk of allowing children to play in swimming pools: Levitt estimates that a child is more than 100 times more likely to die in a swimming pool than playing with a gun.

In a series of subsequent articles, Levitt explored other facets of parenthood and their outcomes. He determined that in spite of the cottage industry of parenting and the millions of how-to books on the subject sold every year, who you are matters much more than what you do. In other words, positive parenting outcomes are linked more strongly to factors such as socioeconomic status and parental education than any specific parenting practices. Key to determining which parenting factors really make a difference to a child's upbringing, Levitt analyses data from the Chicago School Choice Program, a longitudinal study of Chicago school students in 60 schools since 1980, a huge data-set. Factors that are important in determining high standardized test scores in children include: highly educated parents, high socioeconomic status, maternal age of greater than thirty when the child was born, low birth weight, English as the primary language spoken in the home, parental involvement in the PTA, and many books in the home environment. Also, adopted children tended to have lower standardized test scores than their non-adopted peers. Factors that are not important in determining high standardized test scores in children include: the family is intact, the parents recently moved to a better neighborhood, the mother didn't work between birth and kindergarten, the child attended Head Start (US government program providing education, health, nutrition, and parent involvement services to low-income children and their families), the parents regularly take the child to museums, the child is regularly spanked, the child frequently watches television, the parents read to the child nearly every day. Noting the overgeneralization, Levitt explains that what is important in parenting is who you are, not what you do.

Chapter 6: Perfect Parenting, Part II, or: Would a Roshanda by Any Other Name Smell as Sweet?

In this chapter, the authors extend the discussion of parenting with an overview of more economic aspects of parental choices. Specifically, they focus upon the economic implications of children’s names, especially the overtly ethnic African-American names that have become common over the last several decades. The authors tied this issue to a larger question about contemporary black culture in the United States: is distinctive black culture merely a reflection of the economic gap between whites and blacks, or has it actively caused the gap to widen?

Using several decades of name data drawn from California birth certificate records, Levitt’s analysis revealed a number of interesting trends. The authors cite previous research that has shown that similar résumés with white and distinctively black names result in job offers being extended to the white-sounding applicant far more frequently than the black-sounding applicant. Among other things, it was determined that having a distinctively black name was linked to lower attainment and negative life outcomes in terms of employment, income, and education.

Levitt then turned to the question of how names become popular among white Americans. In addition to the general trend of increasingly unique names for white children, Levitt describes a pattern by which highly educated parents popularize obscure names, gradually compelling the names to achieve broader popularity. Finally, after a period of several years, white parents from lower socioeconomic classes adopt the names, prompting a selection of new names among highly-educated white parents, and the repetition of another cycle.

Epilogue: Two Paths to Harvard

The life paths of two Harvard graduates who may have seemed to be locked into divergent patterns of achievement based on their backgrounds are outlined. Ted Kaczynski, also known as the Unabomber, came from a privileged background and had access to all of the resources that are typically correlated with success, whereas Roland G. Fryer, an African-American man who was raised in an impoverished, unstable family environment, is now a promising Harvard economist. The book ends with this brief reminder that there are limits to the ability of economic analysis to predict every possible outcome.

Summary of Rich Dad, Poor Dad: What the Rich Teach Their Kids About Money -- That the Poor and Middle Class Do Not!

The book is the story of a person (the narrator and author) who has two fathers: the first was his biological father – the poor dad - and the other was the father of his childhood best friend, Mike – the rich dad. Both fathers taught the author how to achieve success but with very disparate approaches. It became evident to the author which father's approach made more financial sense. Throughout the book, the author compares both fathers – their principles, ideas, financial practices, and degree of dynamism and how his real father, the poor and struggling but highly educated man, paled against his rich dad in terms of asset building and business acumen.

The author compares his poor dad to those people who are perpetually scampering in the Rat Race, helplessly trapped in a vicious cycle of needing more but never able to satisfy their dreams for wealth because of one glaring lack: financial literacy. They spend so much time in school learning about the problems of the world, but have not acquired any valuable lessons about money, simply because it is never taught in school. His rich dad, by contrast, represents the independently wealthy core of society who deliberately takes advantage of the power of corporations and their personal knowledge of tax and accounting (or that of their financial advisers) which they manipulate to their advantage.

The book’s theme reduces to two fundamental concepts: a can-do attitude and fearless entrepreneurship. The author highlights these two concepts by providing multiple examples for each and focusing on the need for financial literacy, how the power of corporations contribute to making the wealthy even wealthier, minding your own business, overcoming obstacles by not fostering laziness, fear, cynicism and other negative attitudes, and recognizing the characteristics of humans and how their preconceived notions and upbringing hamper their financial freedom goals.

The author presents six major lessons which he discusses throughout the book:

• The rich don’t work for money
• The importance of financial literacy
• Minding your own business
• Taxes and corporations
• The rich invent money
• The need to work to learn and not to work for money

 
Themes in Rich Dad, Poor Dad

• For an individual to be wealthy, he must aim to own the system or means of production, rather than work for another individual. The author stresses that there is obviously something confining about being an employee; it shuts the mind to other possibilities and it stunts initiative.
• Financial intelligence is THE most powerful asset. By studying the precepts of accounting and investing, the author believes that individuals will be able to see the difference between an asset and a liability; in fact it is the more concrete application of learning what’s right and what’s wrong. Generating a string of expenses is wrong, building assets is right.
• Unlike individuals who earn and then pay taxes on what they earn, corporations earn, spend what they want to spend, and then pay taxes on what’s left. Corporations, therefore, hold a certain degree of power. The rich know how to use this power, the poor don’t.
• Fear, laziness, cynicism and arrogance are to be blamed for most of human inaction.

 
Chapter 1: Rich Dad, Poor Dad

The story of Robert Kiyosaki and Mike starts in 1956 Hawaii, when both boys were a nine years old. Their first get-rich scheme was a counterfeit nickel making company. They made plaster molds of the nickels and melted lead toothpaste tubes and filled the molds to produce the nickels. Their plan was foiled by Mike's father, who informed the boys of their illegal activity. After that day, the boys dedicated their free time to leaning about finance and economics from Mike’s father, the rich dad.

The first lesson Mike’s dad made the boys experience was hatred of the “Rat Race”. He was able to achieve this by making the boys work in one of his grocery stores for three hours for ten cents an hour pay. Within a few weeks, Kiyosaki, tired of being exploited for labor, demanded that he receive a raise, but instead, Mike’s father cut his pay and told him to work for free. Eventually, both boys tired of being under appreciated (and unpaid) and they met individually with Mike's father.

In their meetings with rich dad, he apologized for lack of pay and he offered them either the moral of the lesson or a pay raise. Both boys chose to learn the moral of the lesson, while rich dad offered them pay raises. He started at twenty-five cents, a dollar, two dollars, and even five dollars, which would have been considered a large amount of money for an hourly wage, but the boys still remained strong with their decision to learn the moral of the lesson.

The lesson was: get out of the “Rat Race”. Instead of spending your whole life working to put a little money in your pocket and a bunch of money in someone else’s pocket, have other people work hard to put money in your pocket. Out of all the lessons that were taught to the boys, this one was the most important.

Chapter 2: The Rich Don’t Work for Money

The author tells his readers to forget the notion that life teaches. He says “the only thing that life does is push you around.”

This chapter talks about people who are more comfortable in playing it safe because they were not taught early to take risks. The author develops the ideas that the poor and the middle class work for money, fear and greed cause ignorance and poverty, and the importance of using one’s emotions versus thinking with emotions. The author also stresses that opportunities in life come and go; the rich recognize them instantly and turn them into gold bullions. Others do not see these opportunities because they’re too busy seeking money and security. As the author says, well “that’s all they’re going to get.”

Chapter 3: Why Teach Financial Literacy

The story of Kiyosaki and Mike continues later in life, 1990, and both of the now adults have made incredible leaps and bounds with regards to their finances and their socioeconomic status. Mike was able to take the lesson from his father and apply them to his life. He took control of his father’s large business and increased every aspect of the empire and he is currently raising his son to take control of the company once he retires.

As for Kiyosaki, he was able to retire at the age of 47 with his wife Kim. At a business meeting at the Edgewater Beach Hotel in Chicago, Charles Schwab, Samuel Insull, Howard Hopson, Ivar Kreuger, Leon Frazier, Richard Whitney, Arthur Cotton, Jesse Livermore and Albert Fall met to talk about different investments and money schemes. Twenty-five years later, a report stated that a large majority of those extremely wealthy people that met in Chicago either ended up in jail, dead or penniless.

The major idea to take from the results of these unfortunate entrepreneurs is that you need financial literacy to be and stay safe. The idea that was represented with the big 1920’s entrepreneurs is still prevalent today with some of the professional athletes making poor financial decisions and ending up with next to nothing. This specific lesson is meant to teach people not to be wise with your money once you have it, but rather be smart with your money before you have it. In a way, don’t try to build a skyscraper or even a house without building a strong foundation first.

According to Kiyosaki, there is one rule, and only rule that can help a person to build a strong foundation; know the difference between an asset and a liability, and make sure that you only control assets.

When it comes to beliefs about money buying freedom and the ability to enjoy retirement without fear of outliving one’s money, this chapter catches the essence of the author’s advocacy for financial independence. He says, “Intelligence solves problems and produces money. Money without financial intelligence is money soon gone.”

The author believes that financial literacy begins with a working knowledge of accounting. It is essential to know the difference between assets and liabilities. To make these two terms understandable to readers, the author makes a rudimentary diagram of these two concepts to motivate them to purchase assets in order to solidify the asset column, while keeping the liabilities (expenses) to a bare minimum. The author states that poor people remain poor because they do the opposite. They pile up on their liabilities and have zero assets so that their balance sheets and income statements look out of kilter. People have to understand that it’s not how much they make, but how much they keep according to the author, and this is an essential principle that this chapter focuses on.

Chapter 4: Mind Your Own Business

In this chapter, the author slowly introduces the concept of real estate investing and uses McDonald’s as an example. He points out that McDonald’s may not make the best hamburgers in the world, but owns the “most valuable intersections and streets in America.” The author remarks that individuals need to mind their own business if they wish to become financially self-sufficient. They shouldn’t mind their employer’s business, they should strive for ways to become their own boss and nurture their own businesses.

The author continues his discussion on building assets. To him, real assets are anything with value – stocks, bonds, mutual funds, income-producing real estate, notes, royalties from intellectual property, etc.
This chapter also reveals the author’s investment preferences: real estate and stocks. For real estate, he says he starts small, and trades his properties for bigger ones and then delays paying taxes on capital gains through one IRS mechanism.

Chapter 5: The History of Taxes and the Power of Corporations

The author states that the poor let the big machinery (corporations) manipulate them whereas the rich know how to use big machinery. This means that the rich possess the knowledge and savoir faire to use the power of the corporation to protect and enhance their assets. The advantage of a corporation versus that of the individual lies in how corporations pay taxes, according to the author. He makes this point clearly: individuals earn money, pay taxes on that money, and live with what’s left. The corporation, on the other hand, earns money, spends everything it can, and is taxed on anything that’s left. The author adds that individuals may not be aware of how much they’re being manipulated; they work from January to mid-May to enrich the government by paying taxes on their income. In the meantime, the rich are hardly taxed.

The author recommends developing one’s financial IQ as one way of leaving the humdrum of daily existence. This is accomplished by gaining knowledge of accounting, investing, understanding the markets, and the law. He says being ignorant gets you bullied whereas being informed translates into “you have a fighting chance.”

Chapter 6: The Rich Invent Money

The author develops the concept of self-doubt. He says that each person is born with talent but that talent is suppressed because of self-doubt and fear. He remarks that it’s not necessarily the educated smart people who get ahead but the bold and adventurous. People never get ahead financially even if they have plenty of money because they have opportunities that they fail to tap, he stresses. Most of them just sit around waiting for opportunity to happen. The author’s idea is that people create luck; they should not wait around for it. He says it’s the same with money. It has to be created.

In this chapter, the author discusses the importance of an education (although some critics say that he appears to downplay its importance). The author is clear by saying, “a trained mind is a rich mind.” In his analysis, there are two types of investors, each with a different mind set: those who go for the packaged investment, and those who customize investments to suit their objectives.
The author encourages people to hire people more intelligent than they because by capitalizing on the knowledge of others, an intelligent individual builds his own knowledge base and therefore has more power over those who don’t know.

Chapter 7: Work to Learn, Don’t Work for Money

This is the chapter where the author talks about the skills individuals need to develop for financial success.

The reader is given an example of a young woman who had a Master’s Degree in English Literature and who was offended when it was suggested that she learn to sell and do direct marketing. After all the hard work for her degree, she didn’t think she would have to stoop so low to learn how to be a salesperson, a profession she didn’t think very highly of. The author uses this example to emphasize that there are other skills people need to cultivate to help them on the road towards financial freedom.

The author mentions management skills. He says individuals need to know how to manage cash flow, systems, and people. To that he throws in selling and marketing skills. He puts equal emphasis on communication skills. He says there are many people who have the scientific bent and hence have a powerhouse of knowledge, but they fail miserably in communications. These are the people who are “one skill away from great wealth.”

The author calls attention to one outstanding trait of great wealthy families: they give money away – plenty of it – unlike the poor who feel that charity begins at home.

Chapter 8: Overcoming Obstacles

The opinion of the author is that five personality traits hamper human beings: fear, cynicism, laziness, bad habits, arrogance. He explains that while it’s normal to have fear, what matters is how one handles it. The author shares his sentiment about his particular fondness for Texas and Texans: “When they win, they win big and when they lose, it’s spectacular.”

The author maintains that it’s not merely a question of balance but also FOCUS. He recommends that the Chicken Littles of the world be ignored. They’re only concerned about the sky falling, spending the rest of their lives in pessimism. He says he constantly hears people saying they want to be rich, but when it’s suggested that money can be made from real estate, their initial reaction is “but I don’t want to fix toilets.” The author believes it’s ironic that they’re more concerned about trivia like fixing toilets rather than what lies ahead in real estate. As a final point, the author states that it is healthy to be greedy, so when faced with a decision, a person must always ask, “What’s in it for me?”

Chapter 9: Getting Started

This chapter serves as a section on tips to create and build personal wealth. His first tip is, find a reason greater than reality to motivate you. What he means by this is to wake up the financial genius in oneself by empowering the mind. He says that people must have a strong purpose for living.

The next tip is to feed the mind. By feeding the mind, the author contends that people acquire power of choice.

The author also advises people to choose friends carefully. He says to avoid people who proclaim incessantly that the sky is falling and instead encourages readers to spend time with people who enjoy talking about money because they may have valuable lessons to share. The author also believes that people should study one field, and then go out and learn a new one, although it is important to choose what one studies.

Here is another tip that the author observes most people don’t practice: pay yourself first. Even if short of cash, people must pay themselves first. This goes in tandem with managing three things efficiently: cash flow, people and personal time.

Another tip the author gives is being generous. He thinks it makes a lot of sense to pay one’s broker well as he’s an ally, and “your eyes and ears to the market.”

The author suggests having heroes. They are indispensable in life because they not only inspire, they also make it seem so easy. They stimulate the human mind into thinking, “If they can do it, why can’t I?”

“Teach and you shall receive” is another tip that the author shares. His words are eloquent concerning this idea: “There are powers in this world that are much smarter than we are. You can get there on your own, but it’s easier with the help of the powers that be. All you need to be is generous with what you have, and the powers will be generous with you.”

Chapter 10: Still Want More? Here are Some To Do’s

This chapter is sort of a supplement to the previous chapter. It gives readers additional tips to help them reach for financial rewards. One tip is to stop doing what you’re doing – that is, if it’s no longer working or viable. The author encourages readers to look for new ideas, to pick the brains of individuals who have the experience and who have already done what one aspires to do. He advises on keeping the learning curve alive, taking courses, buying tapes, attending seminars.

In looking for real estate investment opportunities, the author recommends looking in the right places. One way of doing this is to jog around the neighborhood one is interested in. People can acquire real estate even if they don’t have sufficient funds for the down payment. In fact, with a bit of cleverness, the author says people can even make money with no capital.