One of my holiday reads is Superfreakonomics – the sequel to the best selling . Freakonomics was not just a fun read, but a wonderful demonstration that “people respond to incentives” –albeit often in unpredictable ways.

In the original, they reported one study of an LA crack dealing gang, and the economics of it. In this book, they look at Chicago , along with many other issues such as altruism, monkeys, global warming, drunk walking and tracking terrorists.

If I have time, I may do potted summaries of several of the chapters, and we’ll start with the prostitution one.

  • Business model is simple – since time immemorial men have wanted more sex than they can get for free, so inevitably this has led to a women supplying sex for a price to satisfy demand
  • In 1910s, one in 50 American women in their 20s were estimated to be “in the army of vice”
  • In Chicago 100 years ago a typical prostitute earned around 11 times the average wage for a woman
  • As prostitution was illegal and a social stigma, this reduced supply, pushing prices up
  • A recent two year study in Chicago of 160 prostitutes found an average week consists of 10 “sex acts” bringing in $350 a week. At $27 an hour this is around four times greater than secondary jobs held by the prostitutes
  • Why has the wage premium fallen so much in 100 years? Competition! From women who have sex with men for free. Yes friends with benefits/casual sex has lowered the average earnings from prostitution!
  • The average price in Chicago is $27 for “manual stimulation, $37 for oral sex, $80 for vaginal sex and $94 for anal sex. 100 years ago oral sex would cost to to three times vaginal sex. Why did it use to cost more? It was seen as taboo.
  • The market share in Chiacgo is 55% oral, 17% vaginal, 15% manual, 9% anal and 4% other.
  • Prostitutes practice price discrimination and on average charge a black customer $9 less than a white customer. Price discrimination only works when one can not resell and benefit from arbitrage. Condition satisfied!
  • With black customers prostitutes normally name the price outright. With white customers they will often ask the customer to name a price.
  • At a set location, the price rarely varies per prostitute, despite variations in attractiveness. Conclusion is customers see prostitutes as commodities like bananas – easily interchangeable.
  • They discovered that pimps actually increase income for a prostitute – on average from $325 to $410 a week. They generate more “tricks”. They compared the value prostitutes get from pimps to the value house sellers get from realtors and conclude you get far better value from a pimp 🙂
  • The average prostitute will turn 450 tricks before being arrested, while 3% of tricks performed are freebies for police officers so a prostitute is 13 times more likely to sleep with a police officer than be arrested by one!
  • Prostitutes react to demand. At holiday weekends prices go up around 30%, and they do many hours of overtime. Also many ex-prostitutes return to the game just for big holiday weekends – a bit like a department store Santa 🙂

The next chapter I’ll cover is the tracking terrorists. One major London bank tried to profile likely terrorists based on the banking records fo those known to be terrorists. One of the indicators they found was that suicide bombers never have life insurance!

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