Who adds more value: a pimp or a Realtor?

Look, it's not my question; it is a question asked by Steven Levitt and Stephen Dubner in the recently-published book, Superfreaknomics. Superfreakonomics is a follow-up to Levitt & Dubner's Freakonomics, a 2005 best-seller that has sold more than 4 million copies. Both books are exercises in behavioral economics, a discipline loosely described as a method of analysis meant to uncover "how people make decisions and how they change their minds." It marries "the economic approach to a rogue, freakish curiosity." Indeed.

One has to guess that one or both of the authors had an unhappy experience in a real estate transaction. How else might we explain the manner in which they go out of their way, in both books, to take pot shots at Realtors? (They use the term generically, not distinguishing between Realtors® and those licensees who do not have that designation. This column will follow their incorrect usage.) In both books their discussions regarding Realtors have no apparent connection to either a main or sub thesis in the book. Though, we might note, other reviewers have been unable ever to detect any main or sub thesis in either of their works.

We examine their question here not because it is an important or insightful one, but because their flippant discussion will unduly influence some of their millions of readers. So, who does add more value? Are the authors correct in claiming that the economic impact of a pimp (or, pimpact, see p.37) is greater than that of hiring a Realtor (Rimpact). As they say, to put it mathematically, is it true that pimpact ... Rimpact ?

Regrettably, the best-selling authors are too busy being best-selling authors to state their argument very clearly. They note that, on the basis of their data (a study in Chicago) prostitutes working with a pimp earned, on average, almost $100 more per week than did their counterparts who worked without a pimp. This happened while pimps took, on average, a 25% commission on the transaction.

On the other hand, the authors claim, home sellers do not get a comparable benefit from employing a Realtor, who, they acknowledge, charges a considerably lower commission (averaging 5%).

Here, the argument begins to get a bit murky. Are we talking about dollars or percentages? The authors tend to obsess on the dollar amount that Realtors® earn rather than the percentage of the transaction. But that is a flawed economic analysis; it is the percentage that is relevant.

Basic to the authors' argument is the claim that "a Realtor and a pimp perform the same primary service: marketing your product to potential customers." Working with this assumption they then rely on a yet-to-be published study from Madison, Wisconsin that is alleged to show that comparable houses sold without a Realtor "typically fetched about the same price as the homes sold by Realtors."

If that is all they have to offer, it seems a pretty weak foundation to support their sweeping and insulting conclusion. The Madison study conclusions differ from numerous other analyses of sales data; and even Levitt and Dubner offer some caveats about it. It could hardly be definitive.

Moreover, there are other relevant points of comparison. The authors fail to note that one of the things that Realtors are paid for – to many people it is the most important of their services – is facilitating the transaction as it proceeds to closing. We suspect that no comparable service is provided by pimps.

Additionally, the authors note that a special value is provided to those prostitutes who work with pimps: they are less likely to be arrested. But the authors fail to note a comparable benefit provided by Realtors. That is, both as a result of their expertise and of the fact that they carry Errors and Omissions (E&O) Insurance, the clients of Realtors stand a better chance of being shielded from a lawsuit. This is not trivial. The pimp's connections (and payoffs) may save the prostitute some hassle and the possibility of a fine in the hundreds of dollars; but that is nothing like having a Realtor's E&O Insurance provide the "deep pockets" and/or a legal defense that can shield a seller from potentially hundreds of thousands of dollars in damages.

Superfreakonomics is a fun and interesting book to read. It goes off on many tangents some of which are questionable. The diatribes about Realtors have little merit, as is true of some of their other critiques. Nonetheless, all of their tangents are stimulating. I recommend the book wholeheartedly.

Published: January 13, 2010

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Bob Hunt is a former director of the National Association of Realtors and is author of the recently published book, "Real Estate the Ethical Way." A graduate of Princeton with a master's degree from UCLA in philosophy, Hunt has served as a U.S. Marine, Realtor association president in South Orange County, and director of the California Association of Realtors, and is an award-winning Realtor. Contact Bob at .