I think I just asked a really stupid question in class, or at least the professor thought so. I still don’t understand what his point is.
I understand the concept of “metaphors,” but the metaphor he is making here makes no sense. fn1. This is all
extremely simple economics, but the professor is muddling it and making it far more complicated than it needs to be. Then, you have a bunch of people trying to prove how smart they are by adding throwing out even more complex explanations, which make even less sense. This is not complex stuff, people.
Of course, the fact that we have a lot of ESL LLMs here makes everything more difficult for them, which is precisely why the professor should try to express things simply.
As an added comedic aside, the other professor in the class (it’s co-taught) just had his cell phone ring in the middle of class. He was trying to turn it off, but couldn’t figure out how. So it kept ringing as he became increasingly frustrated.
1. Not to bore you all to death, but in brief, here’s what was being discussed. We are talking about “free look clauses,” which allow a buyer to sign a purchase contract, inspect property, and then decide whether or not to terminate the purchase agreement based on what they find. Usually, the buyer pays a deposit, which they forfeit if they terminate the contract.
The reasoning for all this is rather simple. The buyer gets to find out if the property is suitable for their intended purpose before making the whole investment. The seller can get a higher price, because the parties negotiate the purchase price based on the assumption that the property will be suitable for the buyer’s intended purchase. While the buyer has the potential of losing the sale if the buyer terminates, they are compensated for this through the deposit. (As I’m writing this, I should note that we’ve now been discussing the reasoning for this for about ten minutes. Talk about overkill.)
(Example: A developer wants to build a shopping mall. He finds a chunk of property, and enters into a purchase agreement. During the free look period, he is going to get environmental approval, have his engineers make sure construction is feasible, secure leases from potential tenants, etc. If these things fall through, he will terminate. However, if he goes through with it, he will pay the previously negotiated price, which is going to be much higher because it was negotiated assuming that the land was suitable for his intended use. If he were buying it without the free look clause, he would be more inclined to pay a price closer to lesser value uses, such as farm land or low density housing.)
Anyway, the professor said that the seller was paying the buyer to acquire information. I didn’t understand why, and the professor said that it was a metaphorical payment. This is untrue, however. No one is paying anyone. The buyer is paying to gather information in three ways. First, they are shouldering the costs of any inspections they undertake during the free look period. Second, they are risking the deposit if they decide not to purchase the property. Third, the initially-negotiated price reflects the premium that assumed the property would be good for originally intended purpose. I can find no rational explanation for a metaphor under which the buyer is paying the seller to collect information. If anything, the “metaphor” cuts the other way.