Year: 2009

It’s not terribly enlightening to assert that the threat of punishment or the promise of reward goes a long way to explaining people’s actions.  Similarly, it’s probably a pretty simplistic view of negotiation to say that it is understanding their perspective, then structuring incentives for other person to do what you want.  I’m not a very strong negotiator, but this forms the core (and almost the whole) of how I try to reach agreements with people:  I try to see the deal from their perspective, then suggest the deal be structured in a way that appeals to BOTH our self-interests.  The silly example from win-win deals of two women fighting over an orange can be viewed as an example of this.  They both had an incentive to possess the orange, but ultimately had rewards that were independent of each other (one to use the rind, the other to use the fruit).  The negotiation can be resolved by structuring the deal in terms that align with the incentive of the other party, i.e. “I only want the rind to bake with, if I give you all the meat to make juice, can I have the whole rind?”

What’s shocking is how often people ignore the incentive of the opposite party when negotiating (then can’t understand when the deal falls through).  Contractors who start a job then disappear for weeks or months on end are an example of this.  The home owner who wanted the work done clearly gave the contractor too much money up front (such that its not worth doing the job to get the balance).  The threat of a lawsuit to get their money back isn’t enough of a threat to get prompt work from the contractor.  Home-owners will gripe and moan about unethical, disreputable contractors, but ultimately I think the home-owner himself screwed up when he structured the deal.  When I had work done on my condo, I paid the painter after the work was done (through Sears) and I paid for the materials for the flooring then the labour once the work was done.  For everyone involved, our interests were aligned in getting the job done as soon as possible (for me to get tenants into the unit and for them to get paid).

I’ve seen people begging in negotiations where they’ll be telling some hard luck story why the person should give them a deal.  Maybe this works sometimes, but I can’t imagine it’s very effective.  Who cares why the person needs a good deal?  (remember, I am pretty hard hearted, so maybe this works on other people, just not on Mr. Cheap).  I saw people trying this in developing countries (“I love this knick knack but I don’t have enough money to pay for it and go on the swim with the dolphins trip.  Would you please, please, please accept less?”), and the vendors had no problem shaking their heads saying “no, sorry, full price”.  My technique was to offer what I was willing to pay, and when they said no I replied “thanks anyway, have a good day” and started to walk away.  Potentially losing the sale was a very good incentive for them to quickly reach an acceptable price.  Of course, I had to actually be prepared to leave, if I’d come back 10 minutes later, you can be sure I’d be paying full price.

One time when I was doing contract programming a gentleman was delighted that I could do the work he needed done, and told me he’d been looking for someone for months without any luck (I was shocked that anyone in business would put themselves into such a weak bargaining position).  I offered a fair price, based on my foolish perspective on pricing to which he responded with a series of e-mails commenting on “he’d find the money SOMEHOW” and “I can pay you instead of feeding my kids for a couple of weeks”.  I guess this was suppose to make me feel sorry for him and drop my price, but instead I got annoyed and worried that he wouldn’t pay his bill after I did the work (and I dropped him instead of taking the job).

Offering potential follow-up work, paying promptly, and being pleasant to work with are all excellent incentives to make a contractor give your work higher priority than other things on his plate.

One landlord I rented from showed me a place mid month and I said I’d take it from the 1st of the month.  After he asked me if I wanted to move in immediately (and I told him I didn’t as I had a place I was living) he said it was mine on the first, unless someone came by to take it sooner.  This clearly would be a great situation from his perspective.  He has an incentive to start collecting rent as soon as possible, so having a guaranteed tenant to start on the first, and the option to take someone sooner, is an ideal situation.  From my perspective, I had an incentive to line up an accommodation for the next month, and I wasn’t particularly keen to have to start looking for a place a couple days before the end of the month when he let me know that someone had taken it sooner.  I thanked him and told him I’d have to rent from someone who could guarantee me the place at the start of the month.  I told him to give me a call at the end of the month if he hadn’t found someone, and if I hadn’t rented elsewhere I’d take his place  (at which point, he figured having me was better than a chance at someone else and said the place was mine on the first if I wanted it).  Immediately, seeing things from his perspective, I realized the threat of having me rent from someone else (and him losing the tenant in front of him for a potential tenant who may or may not show up) was the way to get the deal done.  Having the option to rent to someone else was a foolish thing for him to even try to get, since considering it for even a second from my perspective there’s no way any tenant would have agreed to it (and it slightly soured our relationship from the start).

From psychology the theory of mind deals with developmental stage where people start to understand that other’s have a different mental representation of the world than themselves.  Unless someone is a child (below 3 or 4 years old) or suffers from a developmental disorder (such as autism spectrum disorder) there’s no excuse why they can’t understand other people’s perspective on a conflict and structure a deal that appeals to the other side.  This doesn’t guarantee agreement (or even a good deal), but ignoring this is a recipe for prolonged conflict.

I recently read John T. Reed’s “How to Buy Real Estate for at Least 20% Below Market Value” (Vol. 1) and enjoyed it.  He warns that the book is only applicable for buying in America (and actually refuses to sell it internationally, an American friend got it for me for Christmas).  He’s right that the specific techniques won’t work in Canada, however there’s an underlying theme to the book that I think *is* applicable anywhere.

In the introduction he relates when he was a real estate agent and would hear about people buying property for dramatically lower than market value.  He didn’t believe it, as he had access to the MLS and could see what properties sold for (and he NEVER saw a property that sold for much less than market value).  Eventually he realized that the problem was his source of data.  The properties selling through MLS were selling close to market price because it was an efficient marketplace.  In order to buy property for dramatically under market price, buyers needed to go to inefficient, non-MLS markets.

To me, an efficient marketplace is good at bringing together equally motivated buyers and sellers.  Inefficient marketplaces are bad at this, and often goods remain unsold or sell for far less than they’re worth.

I’ve never sold anything on E*Bay (I don’t *THINK* I’ve ever bought anything on it either).  Some of my friends have used it and like it, but I’ve found that typically they either are selling on it (and getting top dollar for what they’re selling) or are using it to buy hard-to-find goods.  I’ve never heard about people getting killer low prices on E*Bay.  Again, this is an efficient market, and its good for getting market price on goods, but not a great place to find deals.  One technique I’ve heard for finding good deals on E*Bay is looking for items that have been misspelled (like a search for “Bufy the Vampyre Slayer”).  If someone posts the item with the name spelled incorrectly, its often overlooked by the majority of buyers, and you have the chance of getting a good deal.  This is an example of an inefficient market hiding inside an efficient market.

The examples he gives in his book are situations like foreclosures, buying properties with title problems, tenants-in-common (when multiple people share ownership of the same property), and execution sales (where a lost legal judgement can be used to seize a property from its owner).  In each of these situations, real estate agents (and the vast majority of buyers) don’t want to touch these properties with a 10-foot pole.  Because of this, it becomes difficult for buyers and sellers to find each other and the opportunity for good deals occurs.

I had a personal experience with this when I bought my condo.  As I’ve related in the past, the place was quite “rough around the edges” when I got it and I got a good price on it because of that.  Most buyers weren’t interested in doing (or supervising) the necessary renovations to make it habitable, so I was only competing with other buyers willing to renovate (which was a smaller group).  This is the whole basis of the flipping strategy, which ironically has become a hard way to make money as more people are pursuing it, increasing competition on available properties, and decreasing the profit.

There are arbitrage opportunities to make money (or a living) by moving goods between inefficient and efficient markets (beyond the property flipping example).  In my home town a used book dealer would visit all the garage sales on weekends and buy cheap books they had for sale.  The sellers didn’t know if they’d be able to sell them in the rest of the day,  ultimately just wanted to get rid of junk more than anything, and would give him a very good price.  He’d then put them on the shelves of his store where they could sit until they found the right person who was eager to read it and willing to pay a premium for the book.  Even in this case, he’s really moved the book from a very inefficient market to an inefficient market.  The efficient market would be the book store that has everything new, and will order whatever you want that they don’t have on the shelf (and charge you top dollar for this convenience).

As an aside, Mike told me recently that he thinks our book reviews are some of our least popular posts and that we’ll do fewer of them in the future.  I’ve since thought that MAYBE people like them, but just tend not to have any comments about them.  If you’ve liked (or disliked) our reviews in the past, please comment below and it’ll probably influence how likely similar posts are to appear on the site.