Friday, October 07, 2005

Freakonomics - the Klan and real estate agents Freakonomics - the Klan and real estate agents

What do the Klan and real estate agents have in common? Information, or rather, that they thrive(d) on the lack of information.

Starting with the Klan. It had a couple of periods of success, notably during Reconstruction and First World War. As we started to integrate in the 1950s and into the 1960s, it was starting another resurgence, and then it pretty well died out. Why? Information.

The demise of the Klan can be attributed to one man, Stetson Kennedy, a man with the Klan in his bloodlines, but vehemently opposed to it. Because of his bloodlines, he was able to infiltrate it and learn of its secrets. He then took these secrets to Hollywood, and convinced the creators of the Superman series to use them. Then, for six weeks, Superman attacked the Klan, disclosing all of their secrets to the public, including their secret greetings, secret handshakes, etc. The result was that the group became the laughing stock of the country. And, has not recovered since then.

How does this relate to real estate sales? Because real estate sales people make their living based on our ignorance and insecurity. They convince us that they have our best interest at heart, yet have an incentive system designed contrary to this. Their economic incentive is to turn your house over as quickly as they can, even if at a slightly lower price. Not surprisingly then, when they sell their own houses, they sell them for more, and keep them on the market longer. But then, the incentives are in their favor. In the case where they are selling someone else's house, they, on average, make 1.5% of the increase in price if it sells for more (1/2 of 1/2 of the average 6% commission). They get 100% when they sell their own house.

As a side note, the price of term life insurance has plummeted over the last decade - because it is fairly standardized, and people can now easily comparison shop over the Internet. As a result, a lot of insurance sales people who used to specialize in life insurance have moved on to other areas of insurance that are not so vulnerable.

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