Excerpt from Freakonomics by Steven Levitt, Stephen J. Dubner, plus links to reviews, author biography & more

Summary |  Excerpt |  Reading Guide |  Reviews |  Readalikes |  Genres & Themes |  Author Bio

Freakonomics

A Rogue Economist Explores the Hidden Side of Everything

by Steven Levitt, Stephen J. Dubner

Freakonomics
  • Critics' Opinion:

    Readers' Opinion:

  • First Published:
    Apr 2005, 256 pages
    Paperback:
    Apr 2006, 256 pages

  • Rate this book


Buy This Book

About this Book

Print Excerpt


Right?

A real-estate agent is a different breed of expert than a criminologist, but she is every bit the expert. That is, she knows her field far better than the layman on whose behalf she is acting. She is better informed about the house's value, the state of the housing market, even the buyer's frame of mind. You depend on her for this information. That, in fact, is why you hired an expert.

As the world has grown more specialized, countless such experts have made themselves similarly indispensable. Doctors, lawyers, contractors, stockbrokers, auto mechanics, mortgage brokers, financial planners: they all enjoy a gigantic informational advantage. And they use that advantage to help you, the person who hired them, get exactly what you want for the best price.

Right?

It would be lovely to think so. But experts are human, and humans respond to incentives. How any given expert treats you, therefore, will depend on how that expert's incentives are set up. Sometimes his incentives may work in your favor. For instance: a study of California auto mechanics found they often passed up a small repair bill by letting failing cars pass emissions inspections -- the reason being that lenient inspections are rewarded with repeat business. But in a different case, an expert's incentives may work against you. In a medical study, it turned out that obstetricians in areas with declining birth rates are much more likely to perform cesarean-section deliveries than obstetricians in growing areas -- suggesting that, when business is tough, doctors try to ring up more expensive procedures.

It is one thing to muse about experts' abusing their position and another to prove it. The best way to do so would be to measure how an expert treats you versus how he performs the same service for himself. Unfortunately a surgeon doesn't operate on himself. Nor is his medical file a matter of public record; neither is an auto mechanic's repair log for his own car.

Real-estate sales, however, are a matter of public record. And real-estate agents often do sell their own homes. A recent set of data covering the sale of nearly 100,000 houses in suburban Chicago shows that more than 3,000 of those houses were owned by the agents themselves.

Before plunging into the data, it helps to ask a question: what is the real-estate agent's incentive when she is selling her own home? Simple: to make the best deal possible. Presumably this is also your incentive when you are selling your home. And so your incentive and the real-estate agent's incentive would seem to be nicely aligned. Her commission, after all, is based on the sale price.

But as incentives go, commissions are tricky. First of all, a 6 percent real-estate commission is typically split between the seller's agent and the buyer's. Each agent then kicks back half of her take to the agency. Which means that only 1.5 percent of the purchase price goes directly into your agent's pocket.

So on the sale of your $300,000 house, her personal take of the $18,000 commission is $4,500. Still not bad, you say. But what if the house was actually worth more than $300,000? What if, with a little more effort and patience and a few more newspaper ads, she could have sold it for $310,000? After the commission, that puts an additional $9,400 in your pocket. But the agent's additional share -- her personal 1.5 percent of the extra $10,000 -- is a mere $150. If you earn $9,400 while she earns only $150, maybe your incentives aren't aligned after all. (Especially when she's the one paying for the ads and doing all the work.) Is the agent willing to put out all that extra time, money, and energy for just $150?

The foregoing is excerpted from Freakonomics by Steven D. Levitt and Stephen J. Dubner. All rights reserved. No part of this book may be used or reproduced without written permission from HarperCollins Publishers, 10 East 53rd Street, New York, NY 10022

Membership Advantages
  • Reviews
  • "Beyond the Book" backstories
  • Free books to read and review (US only)
  • Find books by time period, setting & theme
  • Read-alike suggestions by book and author
  • Book club discussions
  • and much more!
  • Just $10 for 3 months or $35 for a year
  • More about membership!

Support BookBrowse

Become a Member
and discover your next great read!

Join Today!

Book Discussion
Book Jacket
The Opposite of Everyone
by Joshilyn Jackson

"Quirky and appealing characters, an engaging story, and honest dialogue make this a great book!"
- BookBrowse

About the book
Join the discussion!

Editor's Choice

  • Book Jacket
    The Never-Open Desert Diner
    by James Anderson
    James Anderson's debut novel, The Never-Open Desert Diner, starts off as an entertaining ...
  • Book Jacket
    In the Country of Men
    by Hisham Matar
    Labeled by some as the "Libyan Kite Runner", In The Country of Men does share some ...
  • Book Jacket: Holding Up the Universe
    Holding Up the Universe
    by Jennifer Niven
    Jennifer Niven's spectacular Holding Up the Universe has everything that I love about Young ...

First Impressions

  • Book Jacket

    Victoria
    by Daisy Goodwin

    Daisy Goodwin breathes new life into Victoria's story, and does so with sensitivity, verve, and wit." - Amanda Foreman

    Read Member Reviews

Who Said...

On the whole, human beings want to be good, but not too good and not quite all the time

Click Here to find out who said this, as well as discovering other famous literary quotes!

Word Play

The Big Holiday Wordplay:
$400+ in Prizes

Enter Now

Books that     
entertain,
     engage

 & enlighten

Visitors can view some of BookBrowse for free. Full access is for members only.

Join Today!

Your guide toexceptional          books

BookBrowse seeks out and recommends books that we believe to be best in class. Books that will whisk you to faraway places and times, that will expand your mind and challenge you -- the kinds of books you just can't wait to tell your friends about.

 
X

Free Weekly Newsletter

Keep up with what's happening in the world of books:
Reviews, previews, interviews and more!



Spam Free: Your email is never shared with anyone; opt out any time.