Gongol.com Archives: March 2021

Brian Gongol

March 21, 2021

Business and Finance Hot housing market? List at a higher price.

If you praise your agent for "selling your house quickly" instead of cursing them for "recommending a listing price below equilibrium", then you really should have taken economics in school. ■ The problem here is a pure misalignment of incentives. The difference in commission between an easy sale at $250,000 and a hard one at $275,000 isn't much (to the listing agent). It's $875 if they're taking only the seller's half of a 7% fee, or $1,750 if they're working both sides of the deal. How much work would you do for an incremental $875? A day's worth? Two days? A week? Yet that $25,000 bump in the transaction price means $23,250 in difference to the homeowner selling the house. ■ The bulk of the commission is in the baseline market price, not in the marginal difference they obtain for the seller. And while that's standard practice, it doesn't authentically align their incentives with those of the homeowner -- any more than a 1% annual fee for money managers aligns their interests with those of the client. In both cases, the way to get results is to tie the reward to the marginal difference that the professional makes to their client. ■ In 1961, Warren Buffett wrote about his fee structure for managing money (this was before he took over Berkshire Hathaway). Most of the people entrusting him with their money took a deal where Buffett was paid nothing for the first 4% of returns each year, and where he took 25% of the returns over that amount (or nothing for the first 6% and 33% of anything over that). While 25% or 33% sounds like a lot, it's actually a much better alignment of incentives than 1% of total assets. With a 1% annual fee, the money manager has no incentive but to hold the total pot steady and just look busy. The more the apparent alchemy, the better for the manager. But if the manager makes nothing -- zip -- until they've earned a 6% return, then their incentives turn strictly to outperforming the market. And that, of course, is what Buffett did for his partners: He outperformed. ■ In the real-estate universe, this would be the equivalent of paying the agent nothing (or a flat fee of, say, $1,000) for selling the house at its assessed value, but giving them 33% of any price over the assessment. That, you see, would align the incentives of the homeowner and the agent. The speed to sell a listing isn't itself a signal that the agent has done what's most important to the homeowner -- there's a price at which any house would sell instantly, and that price is $1. Somewhere between $1 and $160 million is a selling price for every home. The price that sells the home overnight is almost certainly not the optimal price for the benefit of the seller (unless, of course, they actually need to sell the home instantly). ■ If you want to know how a system really works, look to how the incentives are aligned. Lots of people get paid to look busy. It doesn't mean they're doing anything evil -- it just means that the system in which they operate is not designed for the outcome that would be demanded by a suitably well-informed client.

Threats and Hazards China sails destroyers near Japan

"The Chinese law that recently took effect enables its coast guard ships to fire on vessels around the Japanese-controlled, Beijing-claimed Senkaku Islands in the East China Sea." Serious provocation? Minor distraction? Meaningful escalation? The problem is that it's often hard to know what's a serious move until it's much too late.

Weather and Disasters First daffodils of spring?

Forget looking for flowers. Just look ahead to the first night the solar-powered lights collect enough juice to remain on.

Weather and Disasters Drone footage of the Icelandic volcano eruption

Truly some of the most spectacular nature footage ever seen

Feedback link