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Game Theory and Real Estate

Source: https://www.quora.com/What-can-game-theory-teach-us-about-real-estate-negotiation

In this blog post, Matthew Holder, a licensed broker, discusses how game theory can play a large factor in real estate negotiations by capitalizing on the asymmetry of information presented to the client and the agent.  As discussed in his blog post, Matthew argues that the two main areas of negotiation are the terms of the listing contract and the purchase contract itself. When it comes to negotiating the listing contract, buyers had no power to negotiate the agent’s commission because it was binded within the listing contract. This allows the listing agent to set their personal dominant strategy because they have an asymmetry of information, allowing the listing agent to hike up commissions.  The purchase contract itself delves deeper into how real estate negotiations occur for the actual purchase of a home. If there are two parties interested in a home, they both have to submit offers at a given date and time. If one party submits earlier than the other, the listing agent can use the asymmetry of information to get a higher offer from the other party. As Matthew stated in his blog, the second party only had two options:

  1. Offer what the party felt was an appropriate value for the home, but with an increased risk of losing to the opposing party
  2. Offer their best offer in order to have the best chance in winning

Because of this, the party ended up paying higher than the list price of the house.

Looking at the blog’s connection to course material, there is a very clear bridge to game theory in theoretical terms with real-life application. In situations such as the prisoner’s dilemma, an asymmetry of information in favor of Prisoner B can provide Prisoner B with a shorter sentence, or no sentence whatsoever while Prisoner A faces the full brunt of the sentence. The same logic applies in real estate, holding information that clients are unaware of allows agents to enact their dominant strategies that provide them with the most benefits, while the clients/buyers are forced to give in. The idea of game theory, however, provides access and further application than just real estate, but business negotiations in general such as buying cars or picking between vendors that sell similar products. Pitting car dealer agents or vendors against each other, although not the most ethical choice, will allow a customer to enact their dominant strategy to haggle prices lower than a competitor. In these cases, the asymmetry of information arises from how the customer will act, and how desperate the seller is to sell their product.

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