Sunday, June 30, 2013

A case study in negotiation: Our new car

In the past couple of weeks, we went through the car shopping process.  The task was to replace our aging and ailing 1997 Oldsmobile Cutlass Supreme with a newer, more reliable car.  In the process, we had a great opportunity to learn all about negotiating big ticket items.  In this post, I'll tell you about one mistake and three smart moves that we made in shopping for and negotiating the price of our car.  In the description that follows, you might tally more mistakes and more smart moves, but I'm trying to keep this post simple so as to highlight the principles at play.

First, let's begin by describing the mistake.  We needed a new car in the short-to-medium term, but we also needed other things like furniture, and we have a lot of start up costs in our new Colorado home (getting new driver's licenses, getting internet, buying a lawnmower, etc.).  Because of the long list of things to do with our new house, my wife and I went car shopping somewhat on a whim.  It was one of the things we were doing that day, but it wasn't the only thing we had on our list.

Shopping on a whim isn't necessarily a mistake, but the consequence is that we did not know the blue book trade in value of our 1997 Olds.  And, walking into a discussion about prices and trade in value without that information is a mistake.  When it came time to talk prices at the dealership, they have you fill out a form, and perhaps the most important line on the form is "What do you think the car is worth?"  As the salesman was inputting our responses, we sort of shrugged and said, "I don't know."  As a result, the dealership appraised the car at much lower than the blue book (we looked it up later), and that set the tone for subsequent negotiations over the price.

With that mistake out of the way, let's discuss some smart moves.

Smart Move #1.  Be mindful of appearances.  Car salesmen make their money by figuring out who has the means to afford a more expensive car versus who doesn't.  If you come into a car dealership in an Armani suit, the salesman is going to nudge you in the direction of the higher end vehicles.  If you come in wearing work boots and dirty jeans, they're going to direct you to their bargain 4x4 trucks.  As discriminatory as it sounds, salespeople are profiling you the instant you drive up to the dealership.  They do this because it allows them to engage in price discrimination, which as we know from the theory of price discrimination increases profit.

For our test driving day, I wore my contacts rather than my glasses and I shaved my stubble because both choices make me look younger.  I also wore my Montana State faded screen t-shirt (over 5 years old, fraying on the collar and fading lettering), which gave off a small town air.  In addition, whenever possible in the discussion, I showed my ability to calculate percentages in my head to indicate level-headedness.  Combined with the fact that we drove onto the lot with a 1997 Oldsmobile Cutlass that hadn't been washed and still had dry leaves under the windshield wipers, we gave off the impression of budget shoppers who had to have a good deal, or else we couldn't swing the payments.  In addition, we brought recent credit reports to the table, signaling some level of preparedness.

It is a tight line to walk between "we want a good price" and "we can't afford this car," but I think we struck the right balance.  My evidence: once we finally filled out our credit application, they were shocked at my monthly salary.  The manager actually sent the salesman back to ask me if I had made a mistake and to gauge if I was lying.  Fortunately, we had already hammered out a deal, which included some significant discounts from the initial price.

Smart Move #2.  Leave the negotiation table and sleep on it.  One of the best things we did was walk out of the dealership after they gave us a price quote at the end of the first round of negotiation.  Dealerships are really good at keeping you at the table for the negotiation until they've gotten you to sign on the dotted line.  They do this for good reason: the longer you sit and stare at the numbers they're showing you while you talk about the great features of the car, the better those numbers start to look.

No matter how good the numbers look, it is a good idea to leave the negotiation table at least once.  The reason is two-fold: (1) It shows the salesman that you're price sensitive and willing to do some research, which is a signal that you're prime for giving a better deal, and (2) It helps you put the numbers and offer in context.

In our case, we went home to look up the Kelly Blue Book "fair price" to see if the deal we were shown was really a good one.  This also gave us time to look up the Kelly Blue Book value of our trade in.  Both actions gave us some concrete figures to use at the negotiation table.  It also took us out of the lair of context and anchoring traps that the car salespeople set for us (see Xan's discussion of Chapter 5 of Influence), which enabled us to more clearly see what would be a good deal.

Smart Move #3.  Shop around.  By far the best thing you can do when shopping for a car is to do some additional shopping after the first round of negotiation.  We solicited quotes from other dealers, and the net result is that we saved about $750.

I would like to take credit for thinking of this in advance, but I can't.  In our car buying experience, we came to this smart move by accident.  I was trying to get an alternative to the Kelly Blue Book valuation, and I found Autotrader.com, which actually presented us with a concrete trade-in offer for our 1997 Olds.  In the process, one of the questions in the survey was "What kind of new car are you looking to buy?"  As a result of my answering that question, Autotrader forwarded our information to three competing dealerships to the one where we shopped for the car.

I submitted the Autotrader survey at 8 am.  At 9 am, I was contacted by a salesman at a dealership about 40 miles away who wanted to know what it would take to get me to travel the 40 miles to do business with them instead.  With an actual offer from my dealership in hand, I knew exactly the price they had to beat and I could emphasize that they needed to make an offer that would entice me to drive farther.  By 11 am, I had two offers that beat the one that we had hammered out the day before.  We went back to our nearest dealership, and they quickly dropped their price to be competitive with our new offers.  We saved $750, and dealt with the dealership we liked.

And, in case you're wondering, here's the new car with the happy new owners.


Hopefully, my sharing my mistakes and successes will help you in your own negotiations.

Monday, June 17, 2013

Pictures from Convocation

This past weekend was University of Chicago's Convocation (what many universities call commencement), and this time, I took part.  I can now officially say that I am a doctor.   Here are some photos from the day:


The cape-like thing in my arm is the Ph.D. hood.  The commencement exercises included the university conferring the degrees, handing out diplomas, and later, bestowing the hood of University of Chicago we who earned the Ph.D.

A note on the outfit: Ph.D. gowns are much nicer than the nearly-plastic gown that students who earn bachelor's degrees wear.  The material is nice, and that's real velvet.  How much to own one of those gowns?  Over $600, and the cap ("tam") is another $84.  In case you're wondering, I didn't pay that amount.  Like most (all?) of my classmates, I merely rented the cap and gown for the bargain price of $60.  I'm sure there's a lesson about anchoring in there somewhere.  For now, here are some more pictures:


This is my graduating class of economics Ph.Ds after the hooding and diploma ceremony.  The man in the red gown is my dissertation committee chair, Ali Hortacsu.  As part of his responsibility for being director of graduate studies at UChicago, Ali was called upon to be the faculty member to place the hoods on us at the ceremony.  As only three of us in this graduating class had Ali as our committee chair, this was special for me (and the other two, I would guess).

In case you're wondering, next to Ali is Hugo Sonnenschein, who is another professor in the economics department.  He's a former president of the university, former department chair, and former director of graduate studies, but he is probably best known for the Sonnenschein-Mantel-Debreu Theorem.

Let's see some more pictures.  Here's a picture of Ali and his three advisees from this year's class:



That's me, Ali, Mickey Ferri, and Chahee Shin.  Mickey studied the consumer decision to Rent, Buy or Pirate movies online and in DVD form.  Chaehee studied entry of mutual fund families into different countries, and in so doing offered a partial explanation for the home bias.

Just in case it gets lost somewhere, here's some evidence that I received the diploma for the Ph.D.


Last but not least, here's a picture of my dad and me walking around campus.


My parents and my aunt traveled across the country to come.  I am glad they came, and as this last picture suggests, I'm looking forward to what is to come.

Saturday, June 8, 2013

Intuition or Evidence?

Robin Hanson has an interesting post on the tradeoff between acting on weak information versus insisting on solid evidence in which he concludes about the sort of topics for which we often present weak information:
On this blog I often present weak clues, relevant to important topics, but by themselves not sufficient to draw strong conclusions. Usually commenters are eager to indignantly point out this fact. Each and every time. But on many topics we have little other choice; until many weak clues are systematically collected into strong clues, weak clues are what we have. And the topics of where our intuitive conclusions are most likely to be systematically biased tend to be those sort of topics. So I’ll continue to struggle to collect whatever clues I can there.
More generally, this is a tension that comes up when conducting academic research.  How do you pick a topic to study?  Most of the topics worth studying are either (A) interesting questions for which you -- for the time being -- can only provide (relatively) weak information, or (B) questions for which weak information exists, but with some work, you can provide solid evidence.  Academic knowledge progresses as people pursue both types of topics.  When it is done right, academic work is a slow accumulation of knowledge that -- hopefully -- leads to the right conclusions.

Wednesday, June 5, 2013

Lying, Murder and the Guilty Client

A defendant goes on trial for first degree murder, and there is a question of whether he should take the stand in his own defense.  Taking the stand as a guilty person risks that the defendant will be cornered into a lie, thereby committing perjury, a serious offense that would increase the punishment.  This threat of additional punishment can work for lesser crimes, but for first degree murder, the punishment is already life in prison or the death penalty.  An increase in the punishment has no force.  Why not lie?

In anticipation of this lack of effective enforcement, the jury might as well assume that the defendant will lie if he is guilty.  Even if the jury would believe an innocent defendant wholly and completely, the veracity of the defendant's testimony depends entirely on the jury's prior belief of the defendant's innocence or guilt.

This isn't complete or fully accurate because the defendant isn't acting alone.  If the defendant is guilty, the defendant's lawyer faces serious consequences for allowing a guilty defendant lie under oath.  And, there are things a defense attorney can do to signal that his client is lying.  If these signals are effective, only an innocent defendant would take the stand.  

In theory, tying the lawyer's fate to the defendant's perjury is a neat way to allow for a defendant to usefully take the stand.  In practice, letting a lying defendant testify creates a series of professional and ethical dilemmas as this Ethics Alarms post illustrates:
The reason the Lying Defendant poses such an ethical conundrum arises from a perfect storm of factors:
  • Anyone accused of a crime has a constitutional right to a defense.
  • Because the burden of proof in the United States is on the prosecution to show guilt beyond a reasonable doubt, the job of the defense attorney is to challenge and test the prosecution’s theory of guilt even when the accused is in fact guilty of the crime. The defendant not only has to be found guilty, he or she has to be found guilty for the right reasons, of the correct crime, using legally acquired evidence, with all the defendant’s rights as a citizen respected and protected, in a fair trial.
  • A criminal defendant has a the guaranteed right to testify in his or her own defense. No one else does. A lawyer who knowingly allows a civil defendant or any witness to give false testimony can be disciplined and even lose the right to practice law. A lawyer who doesn’t allow a criminal defendant who insists on lying under oath to claim his or her innocence will be disciplined.
  • An attorney is absolutely prohibited by the legal profession’s ethics rules from knowingly assisting a client, including a criminal client, in illegal or fraudulent conduct.
  • Everything a criminal client tells an attorney in confidence for the purpose of developing a legal defense is privileged, which means it may not be divulged in court or anywhere else. This includes the words, “I am guilty as hell.” The lawyer may not say or do anything that reveals the privileged information.
  • Lying under oath in one’s own defense is illegal.
Got all that? Put them all together, and this is what a defense attorney faces when his client, who has admitted to his attorney that he is guilty as charged, insists on testifying falsely that he is innocent: 
The attorney must allow the defendant to testify, but the attorney cannot “assist” him in testifying. If the attorney refuses to examine the defendant on the stand, which is assisting him, then the attorney signals to the judge and the jury that the defendant is lying. If the attorney acts in a manner that shows that the client is lying about his innocence, than the attorney has revealed the substance of the client’s confidential communication that he is, in fact guilty, a violation of the attorney’s duty of confidentiality, the foundation of the attorney-client relationship. 
In other words, whatever a lawyer in this situation does, it will violate the ethics rules, the rights of the defendant, or the United States Constitution.
Given the original perjury-has-no-force incentive problem, the simplest solution would be to outlaw taking the stand in your own defense.  This sounds like prohibiting your right to defend yourself, but defending yourself amounts to much more than taking the stand at your own trial.  And, it might be that the best way to defend yourself is to submit to a system that doesn't allow you to speak directly at your trial.  Let the evidence and witnesses speak, and if there's a rebuttal to be issued, the defense attorney can make this case.  In other words, submit completely to a system of legal expertise.

This tension between lawyer and client reminds me of a really interesting paper by Rob Fleck and Andy Hanssen entitled, On the Benefits of Legal Expertise: Adjudication in Ancient Athens (pdf).  Rob and Andy discuss a quirky legal system in Ancient Athens in which legal expertise was banned, and they develop a model to evaluate the costs and benefits of having a system of professional representation.  I'm not sure where the guilty, lying client falls in their model, but it is related.  And, it is an interesting thought experiment unto itself.