We sold a house last year. I had read Freakonomics so I thought I was going to outsmart everybody (which I knew was a stupid to think from the start, of course). Turns out most real estate agents (the ones we talked to at least) weren't even financially literate enough to even understand the concept. At some point I tried to explain to one the Freakonomics theory. He always kept saying 'the more I sell, the more commission' - the concept of 'time value' was completely foreign to him. Maybe he was just playing dumb, I don't know.
Anyway, in my experience, most agents are happy wasting a bunch of time on a sale - having coffee to discuss 'the status' (2 viewings scheduled for next week, the one from last Monday seemed genuine - could have send me a 2 line email. But hey, he could tell funny stories, so I don't mind having coffee); spending 45 minutes on discussing 'the strategy' on how to deal with an offer, ... I never got the impression they cared about a house being a few months longer in their inventory. It filled up their website and office windows, made them big and professional, and as long as their cash flow is OK, anything listed for under a year was OK (much longer than that makes them look weak, of course; also, the market is bad in my area anyway).
I have since reconsidered what I once thought was a plausible argument about real estate agents. Maybe it's sample bias, I don't know, but the ones I dealt with, weren't 'rational actors' in any sense an economist would need them to be to make their models work (and I work with economists and their models a lot).
This is very true - although I think the "non-rational actor" argument needs some thinking through.
The Freakonomics model completely misses the fact that most agents don't often have enough houses to sell for the time spent on each one to be a constraint.
Given that, in many circumstances it really does make sense for the agent to spent an extra few hours working on your house if it will get you another 10K, because they get a small amount of money from that. It's true the marginal gains aren't high, but often they simply have nothing else to do!
Additionally, "working on your house" often means meeting more people who are interested in buying. Very often, some of those people will be looking for an agent to sell their house, so the agent sees that as an advertising opportunity.
> He always kept saying 'the more I sell, the more commission' - the concept of 'time value' was completely foreign to him. Maybe he was just playing dumb, I don't know.
He probably wasn't. That having been said, the inability to understand abstract concepts like the time value of money and being a kickass salesman are not mutually exclusive. Some of the best agents I've met aren't what I'd call bright, but they're quite successful and have incredible sales skills that smarter agents lack.
> Anyway, in my experience, most agents are happy wasting a bunch of time on a sale - having coffee to discuss 'the status' (2 viewings scheduled for next week, the one from last Monday seemed genuine - could have send me a 2 line email.
This isn't remotely irrational -- you just don't understand his purpose. What he's doing by spending 45 minutes chatting with you, in leu of a 2 line email, is building a relationship with you and giving the transaction a more personal touch. These are the kind of soft sales skills that are critical to being a successful agent, since despite the existence of sites like Trulia or Zillow, the majority of your clients will come not from online advertising but from word of mouth. So sure, a 2 line email might have sufficed, but a 45 minute chat where he tells you funny stories is going to leave you feeling a lot better cared for (because, well, you are), and leaves you more inclined to recommend him to your friends in the future.
Plus, you said it's a bad market. It's probably not the case that he has clients banging down his doors, so he needs to make sure that his existing clients are well cared for to ensure future business.
Sure, he was building a relationship, which reinforces the point that he doesn't care about saving a few minutes on a sale, and that he'd rather go out of his way to talk to me/us more than necessary, instead of trying to move his 'dollars per minute' needle up.
Whether that's 'irrational' depends on your definition of 'irrational' - it surely is irrational from the point of view of pretty much every economic model out there.
You can't apply engineer logic here, which seems like what you're trying to do. It's a sales and customer service business. By spending extra time with you his short term dollars per minute needle might be less than it could be (though this is debatable; he might just legitimately have the spare time, since you said it's a slow market), but his long term dollars per minute needle with do better because of the high level of service he's giving you.
To use a tech analogy, this is like suggesting that Zappos customer service ought to be replace by a knowledge base and automatic responders, since spending all that time and money to have human representatives to make customers happy is inefficient and irrational when it could be done cheaper.
I think you're both saying the same thing -- he's just talking about how economist's models don't include this type of thought in their definitions of rationality because it's very difficult to quantify. Instead, they simplify down to money over time and pretend like that's the only valid formula for defining all behaviors.
This excludes more abstract, intangible elements of the exchange that are likely to lead to increased income down the road, but it also excludes behaviors that aren't geared toward maximizes income. It's totally possible that a person is behaving rationally with a different, more abstract goal in mind, prioritized above money over time, like building good friendships or having a flexible schedule. In fact, people make those kinds of tradeoffs where they explicitly prioritize an intangible, subjective quality of life measurement over raw income all the time, but economic models don't account for this.
If I remember correctly the meat of the argument in the book wasn't a just so story about consciously maximized incentives but an empirical look at time on the market for houses that agents sold on behalf of clients versus houses sold on their own behalf.
Anyway, in my experience, most agents are happy wasting a bunch of time on a sale - having coffee to discuss 'the status' (2 viewings scheduled for next week, the one from last Monday seemed genuine - could have send me a 2 line email. But hey, he could tell funny stories, so I don't mind having coffee); spending 45 minutes on discussing 'the strategy' on how to deal with an offer, ... I never got the impression they cared about a house being a few months longer in their inventory. It filled up their website and office windows, made them big and professional, and as long as their cash flow is OK, anything listed for under a year was OK (much longer than that makes them look weak, of course; also, the market is bad in my area anyway).
I have since reconsidered what I once thought was a plausible argument about real estate agents. Maybe it's sample bias, I don't know, but the ones I dealt with, weren't 'rational actors' in any sense an economist would need them to be to make their models work (and I work with economists and their models a lot).