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Why the EqualShares Method works better than other property distribution methods.

Let's grade several property division methods according to three criteria:

Method #1:  The EqualShares Method.

Grades:  Fair?  A   Efficient?  A   Low cost?  A

One of the great things about the EqualShares Method is that each recipient usually ends up believing that he or she got a larger share than anyone else.  

Suppose that Steve and Pam have three things to divide and that they submit the following sealed bids for them:

Since the EqualShares method gives each item to the highest bidder for the second-highest bid price, Pam wins the car for $5,000 and the piano for $4,000, while Steve wins the home theater system for $3,000.   To balance things, Pam pays Steve $3,000 in cash.  Pam ends up with a car she values at $6,000, a piano she values at $5,000, and $3,000 less in her bank account, so she believes that she’s walking away with $6,000 + $5,000 - $3,000 = $8,000.  This is well more than half of the $14,000 value that she places on the combined property.  She's going to be happy. What about Steve?  He walks away with a home theater system he values at $6,000, plus $3,000 in cash, so he thinks he's getting a total of $9,000 worth of property.  Since this is also more than half of the $15,000 value he places on everything, he's also going to be happy.  The method is efficient in that it gives each item to the person who values it most.  It also doesn't take much time to administer.

Method #2:  Sell everything and split the proceeds among the recipients.

Grades:  Fair?  A   Efficient?  D  Low cost?  B

The problem with this method is that people often value their own stuff more than outsiders do.  Suppose, for example, that Steve and Pam's things have these market values:      

If they sold everything, Steve and Pam would each get $5,000 in cash.  Under the EqualShares Method, Steve thought that the value of his share was $9,000 and Pam thought that the value of her share was $8,000.  

This also isn't a low cost method, since it takes time and money to sell property to outsiders.

Method #3:  I divide, you decide.

Grades:  Fair?  C   Efficient?  C  Low cost?  A

This is a method children often use when they need to split a piece of cake--one kid cuts the cake and the other gets first pick.  To apply this to a two-way division of property, you'd have one recipient divide the property into two lists and let the other pick one.

Once again, assume these valuations:

Suppose Pam divides and Steve decides.  To divide the property as evenly as possible, Pam puts the car on one list and the home theater and piano on the other.  Steve, of course, chooses the list with the home theater and piano.   

This method isn't very fair, since it's biased against the divider and in favor of the decider, and Pam ends up preferring Steve's share to her own.  The method also isn't efficient--notice that the piano ends up going to Steve, who values it less.

Method #4:  Have recipients take turns picking what they want.

Grades:  Fair?  D   Efficient?  C   Low cost?  A

Here are the valuations again:

If Steve picked first, he'd choose the home theater system.  Pam would choose the car and Steve would then choose the piano.  This method is unfair, since it's biased in favor of the first person to pick.  It's also inefficient, since Steve gets the piano even though Pam values it more.

Method #5:  One recipient assigns prices and the other "buys" items based on those prices.  Shares are balanced with a cash payment.

Grades:  Fair?  C   Efficient?  A   Low cost?  A

Assume again the following valuations:

Suppose Pam puts price tags on each item with her valuations, and lets Steve "shop."  He passes on the car and piano, since he doesn't value them as much as she does, but he takes the home theater for $3,000.  Since she values their combined property at $14,000, she'll have to write him a check for $4,000 in order to balance the shares.  

This method is efficient in that each item goes to the person who values it the most.  It also doesn't cost much to administer.  The problem is that it's not nearly as fair as the EqualShares Method.  Pam walks away with $11,000 worth of property less $4,000 worth of cash, for a net value of $7,000.  This is exactly half of the value she places on their combined property.  Steve, however, walks away with the home theater system, which he values at $6,000, plus $4,000 cash, or $10,000 worth of property.  This is two-thirds of the value he places on their combined property.  With this method, whoever "shops" based on the other's valuations gets a much better deal.

Method #6:  Have an appraiser value the property, then let the parties take turns picking items at the appraised values.  Shares are balanced with cash payments.

        Grades:  Fair?  D   Efficient?  D   Low cost?  D

Assume these valuations: 

If Pam picks first, she'll pick the home theater, since it's worth $3,000 to her, but she'll only be charged $1,000.  This gives her a "profit" of $2,000.  Steve will pick the car, giving him a "profit" of $5,000 - $4,500, or $500.  Pam will then get the piano.

This method is unfair.  Pam will be charged $1,000 for the home theater system and $4,000 for the piano.  Since this is more than half of the $9,500 value given by the appraiser to their property, she must write Steve a check for $250 to balance things.   Based on her own valuations, she walks away thinking that her share is worth $3,000 + $5,000 - $250 = $7,750.  Steve gets the car, which he values at $5,000, plus a check from Pam for $250.  He believes that his share is worth $5,250.  He ends up feeling cheated, since he'd prefer Pam's share to his own.

This method is also inefficient.  Pam gets the home theater, even though Steve values it more.  Steve gets the car, even though Pam values it more.

Finally, it's costly to administer, since appraisers charge for their services.

 

 

Copyright © 2004  Lori Alden.  All rights reserved.