Put Your Money Where Your Mouth Is

I was listening to a Freakanomics podcast which discussed how people like to predict things (supposedly because a more predictable world makes them feel safe) and how since there is rarely a penalty for being wrong, people make outlandish predictions without consequence.  Being right occasionally allows them to point to their successes without anyone remembering the many times they predictions were wildly off base.  In the poker world, we call this freerolling, where the is no chance to lose, but only a chance to win.  This idea offends me as someone who has built his business on making predictions that are right more often then not and backing those predictions up with my own money.

While watching an episode of Million Dollar Listing: Los Angeles, Josh, a broker, was met with the owner of a multimillion dollar house that he needed sold within 30 days.  The seller seemed like a shrewd businessman when he negotiated his contract with Josh to sell the house, and Josh assured him it would be sold within the allotted time.  When Josh was unable to sell it within 30 days, he called the seller begging for additional time.  Josh wanted the nearly $250,000 commission for selling the house and on the phone he said, “we can definitely sell this house in an additional 30 days,” “we have a number of interested people” and other similar unverifiable, yet very soothing things.  These sort of bold, self serving statements that have no penalty for being incorrect bother me.

In light of his previous promise and failure, I was surprised that the owner allowed Josh the additional time without adding in any additional stipulations.  After all, it was the seller who lost if the house went unsold, and there were no negative consequences for Josh only monetary gain.

If I were the seller in this situation, I would have suggested that if Josh was unable to sell the house in the 30 days, he should owe me a set amount of money.  Without any skin in the game, Josh was free to guarantee the house would be sold with me taking all the downside risk if it did not sell.  In this case, he was free to guarantee it twice without any consequence for being wrong.  If Josh truly had an idea of the timeframe for the sale of the house, then he should have been willing to wager on it (especially since he is the expert and the seller was not).   In this case, it would work like an option.  If he sold the house, he would get $250,000 and if he did not, he would give me some set amount of money, say $50,000.  Since Josh is an expert and “knows the house is going to sell,” it should be easy money for him.

The truth is that Josh was exaggerating his knowledge of the situation and making him put his own money on the line would make him be more circumspect about what the real probabilities of selling the house are.  If they were forced to wager on the outcome, the seller (who is in the broker’s realm of expertise) could get a more accurate picture of what the broker believes the true probabilities are.  This seems like a good way to bring more honesty in businesses like contracting where one side has an incentive to make outlandish predictions without any penalty for being incorrect.

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One Response to Put Your Money Where Your Mouth Is

  1. debie says:

    BRAVO-I totally agree!

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