real estate and game theory
Source:
https://link.springer.com/content/pdf/10.1007/BF00177946.pdf
https://www.quora.com/What-can-game-theory-teach-us-about-real-estate-negotiation
Over this past week we have discussed so much in class about Nash Equilibrium in Game Theory. Since I will soon transfer to the Hotel School and plan to concentrate on Real Estate, I did a little bit of research to expand my knowledge on the game theoretic approach to bidding prices of real estate properties.
I took a look at and analyzed these two articles/discussions by Taewon Kim, an economics professor at California State University LA, and licensed broker Matthew Holder. Taewon Kim claims that classical bargaining literature in game theory has taken the cooperative approach and as a result abandoned attempts to model the actual process of negotiation. What he means by that is that the static concept of the Nash equilibrium has been the standard solution in noncooperative game theory, in which the buyer and seller make a choice from their sets of opportunities, and those two choices interacting with one another will lead to the Nash equilibrium when each agent’s choice is the best to that person, given the other person’s choice. Kim later goes on with 10 pages explaining why the actual negotiation process isn’t that simple when taken into consideration many other different factors.
One of the factors is discussed in very thorough details by Matthew Holder. He points out that in the bidding of properties, real estate agents have a very powerful asymmetry of information and can use that as leverage to increase their commissions on the sale of that property. The real estate agent will be involved in negotiating the listing contract and the purchase contract. In the case of the listing contract, agents had so much power in this process about 15 years ago when potential buyers do not have access to the list of real estate listings, so agents use their information to force the sellers to agree upon an appropriate commissions fee before they show their homes to potential buyers. Nowadays websites like Zillow has made that less of an issue. But in the Purchasing contract is where the agent’s information can really hurt you. Since agents usually claim that they have had others offers and will give you the opportunity to make your own offer, you will have two of these choices: either to bid your true value and risk losing or bid as high as you can and increase your chance of winning. Whether you win or lose you will still feel like you’re not winning. This is explained by Taewon and ECON2040 course materials as the winner’s curse. If you win the bid, you will be thinking that you could have saved some money by bidding lower. Holder claims that in most cases, because of the overwhelming incentive to win the house, most clients will choose to bid higher than their true value. And this is how real estate agents leverage game theory and their powerful asymmetry of information to sell the house at a higher price and at the commission rate that they desire. This information is so useful to know if I later on choose to go into being a real estate agent.