|
|
Executive Times |
||
|
|
|
||
|
|
|
||
|
|
2005 Book Reviews |
||
|
|
Freakonomics: A Rogue Economist Explores the Hidden Side
of Everything by Steven D. Levitt and Stephen
J. Dubner |
||
|
|
Rating:
••• (Recommended) |
||
|
|
|
||
|
|
Click on
title or picture to buy from amazon.com |
||
|
|
|
||
|
|
|
||
|
|
Quirky Freakonomics grew out of a 2003 interview about
economist Steven Levitt written by Stephen Dubner in 2003 in The
New York Times. Levitt’s inventive mind leads
him to examine conventional wisdom or search for answers to unusual questions,
and his perspective can raise many hackles. Dubner
hit it off with Levitt during the interviews for
the 2003 article, and decided to collaborate, to each other’s benefit. The
result is an interesting book that weaves together an approach to economic
thinking that will startle and amaze readers. Here’s an excerpt, from Chapter 2, “How
is the Ku Klux Klan Like a Group of Real-Estate Agents?” pp. 70-76: If
you were to assume that many experts use their information to your detriment,
you’d be right. Experts depend on the fact that you don’t have the information
they do. Or that you are so befuddled by the complexity of their operation
that you wouldn’t know what to do with the information if you had it. Or that
you are so in awe of their expertise that you wouldn’t dare challenge them.
If your doctor suggests that you have angioplasty—even though some current
research suggests that angioplasty often does little to prevent heart
attacks— you aren’t likely to think that the doctor is using his
informational advantage to make a few thousand dollars for himself or his
buddy. But as David Hillis, an interventional
cardiologist at the University of Texas Southwestern Medical Center in
Dallas, explained to the New York Times, a doctor may have the same
economic incentives as a car salesman or a funeral director or a mutual fund
manager: “If you’re an invasive cardiologist and Joe Smith, the local
internist, is sending you patients, and if you tell them they don’t need the
procedure, pretty soon Joe Smith doesn’t send patients anymore.” Armed
with information, experts can exert a gigantic, if unspoken, leverage: fear.
Fear that your children will find you dead on the bathroom floor of a heart
attack if you do not have angioplasty surgery. Fear that a cheap casket will
expose your grandmother to a terrible underground fate. Fear that a $25,000
car will crumple like a toy in an accident, whereas a $50,000 car will wrap
your loved ones in a cocoon of impregnable steel. The fear created by
commercial experts may not quite rival the fear created by terrorists like
the Ku Klux Klan, but the principle is the same. Consider
a transaction that wouldn’t seem, on the surface, to create much fear:
selling your house. What’s so scary about that? Aside from the fact that
selling a house is typically the largest financial transaction in your life,
and that you probably have scant experience in real estate, and that you may
have an enormous emotional attachment to your house, there are at least two
pressing fears: that you will sell the house for far less than it is worth
and that you will not be able to sell it at all. In
the first case, you fear setting the price too low; in the second, you fear
setting it too high. It is the job of your real-estate agent, of course, to
find the golden mean. She is the one with all the information: the inventory
of similar houses, the recent sales trends, the tremors of the mortgage
market, perhaps even a lead on an interested buyer. You feel fortunate to
have such a knowledgeable expert as an ally in this most confounding
enterprise. Too
bad she sees things differently. A real-estate agent may see you not so much
as an ally but as a mark. Think back to the study cited at the beginning of
this book, which measured the difference between the sale prices of homes
that belonged to real-estate agents themselves and the houses they sold for
their clients. The study found that an agent keeps her own house on the
market an average ten extra days, waiting for a better offer, and sells it
for over 3 percent more than your house—or $10,000 on the sale of a $300,000
house. That’s $10,000 going into her pocket that does not go into yours, a
nifty profit produced by the abuse of information and a keen understanding
of incentives. The problem is that the 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. This
can be tricky. The agent does not want to come right out and call you a fool.
So she merely implies it—perhaps by telling you about the much bigger, nicer,
newer house down the block that has sat unsold for six months. Here is the
agent’s main weapon: the conversion of information into fear. Consider this
true story, related by John Donohue, a law professor who in 2001 was teaching
at Stanford University: “I was just about to buy a house on the Stanford
campus,” he recalls, “and the seller’s agent kept telling me what a good deal
I was getting because the market was about to zoom. As soon as I signed the
purchase contract, he asked me if I would need an agent to sell my previous
Stanford house. I told him that I would probably try to sell without an
agent, and he replied, ‘John, that might work under normal
conditions, but with the market tanking now, you really need the help
of a broker.’” Within
five minutes, a zooming market had tanked. Such are the marvels that can be
conjured by an agent in search of the next deal. Consider
now another true story of a real-estate agent’s information abuse. The tale
involves K., a close friend of one of this book’s authors. K. wanted to buy
a house that was listed at $469,000. He was prepared to offer $450,000 but he
first called the seller’s agent and asked her to name the lowest price that
she thought the homeowner might accept. The agent promptly scolded K. “You
ought to be ashamed of yourself,” she said. “That is clearly a violation of
real-estate ethics.” K.
apologized. The conversation turned to other, more mundane issues. After ten
minutes, as the conversation was ending, the agent told K., “Let me say one
last thing. My client is willing to sell this house for a lot less than you
might think.” Based
on this conversation, K. then offered $425,000 for the house instead of the
$450,000 he had planned to offer. In the end, the seller accepted $430,000.
Thanks to his own agent’s intervention, the seller lost at least
$20,000. The agent, meanwhile, only lost $300—a small price
to pay to ensure that she would quickly and easily lock up the sale,
which netted her a commission of $6,450. So
a big part of a real-estate agent’s job, it would seem, is to persuade the
homeowner to sell for less than he would like while at the same time letting
potential buyers know that a house can be bought for less than its listing
price. To be sure, there are more subtle means of doing so than coming right
out and telling the buyer to bid low. The study of real-estate agents cited
above also includes data that reveals how agents convey information through
the for-sale ads they write. A phrase like “well maintained,” for instance,
is as full of meaning to an agent as “Mr. Ayak” was
to a Klansman; it means that a house is old but not quite falling down. A
savvy buyer will know this (or find out for himself once he sees the house),
but to the sixty-five-year-old retiree who is selling his house, “well
maintained” might sound like a compliment, which is just what the agent
intends. An
analysis of the language used in real-estate ads shows that certain words are
powerfully correlated with the final sale price of a house. This doesn’t
necessarily mean that labeling a house “well maintained causes it to sell for less than an
equivalent house. It does, however, indicate that when a real-estate agent
labels a house “well maintained,” she is subtly encouraging a buyer to bid
low. Listed below are ten terms commonly
used in real-estate ads. Five of them have a strong
positive correlation to the ultimate sales price, and five have a strong
negative correlation. Guess which are which. Ten Common
Real-Estate Ad Terms Fantastic Granite Spacious State-of-the-Art ! Corian Charming Maple Great Neighborhood Gourmet A “fantastic” house is surely fantastic
enough to warrant a high price, isn’t? What about a “charming” and “spacious”
house in a “great neighborhood!”? No, no, no, and
no. Here’s the breakdown: Five Terms Correlated to a Lower Sales Price Granite Stete-of the Art Corian Maple Gourmet Five Terms Correlated to a Lower Sales Price Fantastic Spacious ! Charming Great
Neighborhood Three of the five terms correlated with
a higher sales price are physical descriptions of the house itself: granite,
Conan, and maple. As information goes, such terms are specific and
straightforward—and therefore pretty useful. If you like granite, you might
like the house; but even if you don’t, “granite” certainly doesn’t connote a
fixer-upper. Nor does “gourmet” or “state-of-the-art,” both of which seem to
tell a buyer that a house is, on some level, truly fantastic. “Fantastic,” meanwhile, is a
dangerously ambiguous adjective, as is “charming.” Both these words seem to
be real-estate agent code for a house that doesn’t have many specific
attributes worth describing. “Spacious” homes, meanwhile, are often decrepit
or impractical. “Great neighborhood” signals a buyer that, well, this house
isn’t very nice but others nearby may be. And an exclamation point in a
real-estate ad is bad news for sure, a bid to paper over real shortcomings with
false enthusiasm. If you study the words in the ad for a
real-estate agent’s own home, meanwhile, you see that she indeed
emphasizes descriptive terms (especially “new,” “granite,” “maple,” and
“move-in condition”) and avoids empty
adjectives (including “wonderful, “immaculate,” and the telltale “!”). Then she patiently
waits for the best buyer to come along. She might tell this buyer about a
house nearby that just sold for $25,000 above the asking price, or
another house that is currently the subject of a bidding war. She is careful
to exercise every advantage of the information asymmetry she enjoys. But
like the funeral director and the car salesman and the life-insurance
company, the real-estate agent has also seen her advantage eroded by the Internet.
After all, anyone selling a home can now get online and gather her own
information about sales trends and housing inventory and mortgage rates. The
information has been set loose. And recent sales data show the results.
Real-estate agents still get a higher price for their own homes than
comparable homes owned by their clients, but since the proliferation of
real-estate websites, the gap between the two prices has shrunk by a third. Freakonomics makes correlations come alive,
especially for those who are intimidated by the dismal science of economics. Levitt applies the tools of his trade in ways that engage
and entertain, but also raise questions about serious public policy issues. Steve Hopkins,
June 25, 2005 |
||
|
Buy Freakonomics @ amazon.com |
|||
|
|
|
||
|
Go to Executive Times
Archives |
|||
|
|
|
||
|
|
|
||
|
|
ã 2005 Hopkins and Company, LLC The recommendation rating for
this book appeared in the July 2005
issue of Executive Times URL for this review: http://www.hopkinsandcompany.com/Books/Freakonomics.htm For Reprint Permission,
Contact: Hopkins & Company, LLC • E-mail: books@hopkinsandcompany.com |
||
|
|
|
||
|
|
|
||
