On aligning incentives: Let us take a common scenario:
Situation: Jake is trying to sell his house. The real estate agent has told him that a good price for the house would be 300,000 dollars.
Complication: Jake, like, any normal human being, would love to get a little more value out of the deal. And he constantly pushes the real estate agent who refuses to budge. At this point, Jake wonders why the real estate agent is not lapping up the deal in glee! It may be tougher to sell the house, but wouldn’t the extra 10,000 dollars be good for everyone?
Question: Would it really leave Jake’s agent better off?
Analysis: Let’s take a look at the numbers. For the extra $10,000 – the agent fee amounts to 5% or $500. This is split 50% with the buyer’s agent which brings the number down to $250. The agent then splits another 50% with his agency meaning he pockets $125 in return for the extra $9500 he has helped Jake earn. Hence, Jake’s real estate agent is much better off pricing Jake’s house such that the deal is done quickly so he can move on to the next.
This tends to sound common sense but I’ve found myself wondering (in many instances) as to why a friend/colleague doesn’t agree with me on the extra push or effort especially when the benefits seem ‘obvious’ to me.
So, the next time we feel friction or annoyance when asking a colleague or a friend for a favor, let’s make sure we check if our incentives are aligned.
Source: ‘Freakonomics‘ by Steven D. Lewitt and Stephen J. Dubner