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Forget regulation, let track records rule

By Nicholas Gruen - posted Wednesday, 9 May 2007


Ask a real estate agent what price they expect a house they’re auctioning to sell for, chances are his indicative price will be a massive underestimate. For him the more the merrier at the auction and who knows, you might get your hopes up and end up joining the bidding.

The practice of underquoting has been outlawed in Victoria since February 2004 but, as The Age reported on its front page recently, it’s still rampant.

Still it beats me why we invoked the heavy hand of the state (yet again) to protect the naïve from the minor inconvenience of turning up to an auction only to be outbid. (This is while we’re promised a 25 per cent reduction in red tape.)

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Even here regulation has its own unique costs and unintended consequences. Consumer Affairs brochures informing us that these transgressions have now been outlawed no doubt led some over-serious souls to have greater confidence in indicative auction prices.

Although we know that markets can’t work without well informed buyers, and that sellers have a range of incentives to conceal the truth from them, governments are still back in the Stone Age when it comes to addressing the problem.

First, there’s St Augustine’s regulation - a worthy goal that’s not enforced. Lord make me virtuous, but not yet. Then there’s St John Nepomucene’s regulation. St John is the patron saint of floods victims, but we’ll come back to him.

When governments are in “something must be done” mode, a flood of mandatory disclosure regulation is never far away. Whether it does any good it can’t do much harm, can it?

But disclosing information is not the same as informing. Sometimes it can be the opposite. Consumers can only absorb so much after which more information doesn’t inform, it obfuscates. Thus by demanding excessive disclosure in the form of client risk assessments and 40-page product disclosure statements, Financial Services Reform bamboozles investors and helps “financial planners” dress up their own commission-driven selling of investment products as independent “financial advice”, complete with government validated Financial Services Licenses.

That reminds me about St John Nepomucene. He might be up there protecting us all as best he can from the deluge. His own fate? He drowned. But I digress.

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Governments have been too focused on the morality plays that drive our tabloid media. That’s not to say that we shouldn’t redress clear wrongs. Indeed prohibitions on misleading conduct provide a basic foundation for a well informed market - at least if they are enforced!

But there’s a better more positive way we should try alongside minimum standards of disclosure. The way consumers deal with their abundant ignorance is by boning up - not on the product (you can never know enough) but rather on the seller’s reputation.

I don’t need to be a computer expert or to audit the hardware and software on all the computers on offer to know that Apple products are unusually easy to use. Reputation, not first hand knowledge, is my guide.

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First published in The Age on May 3, 2007.



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About the Author

Dr Nicholas Gruen is CEO of Lateral Economics and Chairman of Peach Refund Mortgage Broker. He is working on a book entitled Reimagining Economic Reform.

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