How Incentives Affect Human Behavior
While waiting for a friend today, I stopped by a book shop and browsed through Freakonomics by Steven D. Levitt and Stephen J. Dubner. I wasn’t looking for this book although I’ve seem to come across it online sometime ago.
The one key thing I picked up browsing through this book is how human behavior can be altered by seemingly a small action or lever if you will call it that. And the resulting change in human behavior en masse could turned out to be huge and beyond prediction.
I thought it was quite interesting. One example that caught my attention has to do with real estate agents. Previously a good friend whom I regard highly mentioned he does not bargain with real estate agents on fees. He’d tell the agents up front he won’t negotiate on fees with the expectation the agent will do his or her best to sell the property at the highest possible price. It this book, Freakonomics, it was found through research and doing statistical analysis, that the real estate agents would not be interested to sell a house for an additional 10,000 if they can close the deal fast. For instance, if a home is sold at $300,000, the commission taken by the agent would be about 1.5% net. This means, they get $4,500 from the deal. If they hold out selling your property and manage to sell it at $10,000 more, they’d get an extra $150. Common sense tells you that nobody is going to do that. Put yourself in the estate agent’s shoes and you’d probably do the same.
However, until the survey was done, this was quite hard to prove. I won’t go into details here, but what the authors found out was, on average, for a $300,000 property, most customers would be able to sell the home for $300,000. BUT if the home was owned by an estate agent, the AVERAGE home taking location, timing etc, was $310,000. For the extra time and effort to gain $10,000 for their own property, estate agent would go the extra mile but don’t count on this happening for you, the average guy who wants to sell his house.
This means based on how a person is rewarded, it changes the dynamics of so call professionals level of professionalism.
Freakonomics on DVD is you are lazy to read.
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