Freakonomics: A Review

freakonomics I finally jumped on the Freakonomics bandwagon and borrowed and read the book. I realize I’m a bit late in this, but since I haven’t read any other reviews on the book before I got it (other than just hearing it was “good”) I suppose I have not been influenced too much. And my opinion on this books is not as crazy-good as it sounds like most other reviews are giving it.

Basically, the book claims no central theme, and certainly doesn’t give one. The only thing tying it together is the personality of the author, a faux-economist, Steven D. Levitt. He does seem to be able to take interesting questions and make interesting points and conclusions from some relevant data. Some of the most interesting questions are things like “Why do drug dealers live with their moms if they make so much money?”, “Is sumo wrestling corrupt?”, and “Do U.S. teacher cheat for their students?”.

Interesting questions, to say the least. But, if you’re looking for some applicable methodology, this isn’t the book for you. Levitt does seem to have a knack for asking the obvious questions and getting some semblance of an answer out. So, if you’re entertained by economics (who isn’t?), then it might be a good read. Otherwise, I’ll let you in on the only applicable tip I learned from the book.

Tip: When dealing with a real estate agent, you need to incentivize them properly. The commission isn’t enough.

Levitt says, and I agree, that the agent is not incentivized to sell your house at the highest possible price. Their typical commission (after costs and kickbacks to the broker, etc) is 1.5% of the total sale. On a $300k house, that means they get $4500. If you wanted $310k for your house, you’d think the agent would be apt to hold out for a few days for you. But, think about it. They only get $150 more for holding out on an offer. And a few days to an agent isn’t worth $150 extra. They’d rather have you sell it NOW at $300k than hold out for a potential $150. You lose a potential $9500 on that deal (after costs)!

So, how should you deal with that? Well, my idea would be to tell your agent up front what your lowest possible sales price would be. Say, $300k. You won’t sell for less than that. Period. But, for anything over that, offer the real estate agent 20-30%. Now, look at what the incentives would be. If the agent gets another $10k out of the buyer, the agent gets almost as much out of that $10k than they did on the first $300k. They would get about $2-3k more, making them about $6500-7500. You, on the other hand are making about $6500 more. And it costs only a few days. It benefits everyone, and everyone is incentivized properly.

Now, if you’re a real estate agent, you might even want to bring up this as a possible strategy too. Why? Because you’re honest about what motivates you. When you’re dealing with someone who understands your incentives, you shouldn’t pretend that you’re working for their best interest only. Put all the money out on the table. Get real with your clients. They’ll understand your position (probably already do), and you’ll make more money.

[tags]real estate, freakonomics, levitt, review, economics, book[/tags]

Nate Ritter lives in the Pacific Northwest (U.S.), popularized the #hashtag and creates web applications for a living. He also does miles and point hacking to enable cheap travel for his family. More here →

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