The story I will tell you is about Professor Max Bazerman at Harvard University in Boston who used to teach a course in Negotiation Skills. He always started the class with an auction of a 20 dollar bill he put up from his own wallet….
There were only 2 rules for the auction;
Rule 1: You must always raise the bid with $1 at a time.
Rule 2: The 2nd highest bidder must unfortunately also pay his last bid – but without getting anything in return. The trick is obviously not to “be left with the Old Maid”, meaning that being 2nd is to be the real loser.
When the auction starts usually many students – but not all – participate. Some (..smart, or risk averse ?) students have already anticipated what will happen before the auction started and refrain from bidding. When the bids reach the $ 12 – $ 16 level, only 2 students continue to bid. All the others have stopped by now, because they have realized the outcome and the rules allow them to stop at no charge. The remaining 2 bidders now both change from playing-to-win the 20 dollar bill at a cheap price to playing-not-to-lose by trying to avoid being left with The Old Maid, hoping that their opponent will chicken out.
The bidding continues although the possible net profit rapidly decreases. After the bids reach $19 and finally $20, the bidding continues! Even the winner of the auction will now start to lose, because if he would get the 20 dollar bill for $24, the loss is $4. Not much, but a loss is still a loss – and losses hurt! Hence, the fight continues but now about who is to lose the least and soon both players are totally out of control.
The record sum that Max Bazerman’s auction has stopped at is at $204!!! The reason for this completemy idiotic behavior is that all people feel that “losses loom larger than gains” (see my earlier post). This is set deep inside our brains, far away from our logical pre-frontal cortex, and only awareness of this malfunction can stop us from acting foolish.
If we for instance look at e-auctions today, there is a similarity with Bazerman’s auction because many of the participants in these auctions must cover for their fixed costs. Hence they are willing to go far ahead in bidding against the others, because if they do not get the business they will lose money. It might be that all the bidders lose, it is just a matter of who loses most. This is commoditization at its worst.
There are surely other situations you can think of where this auction story may shed some light of understanding. Even some conflicts that escalate to full-blown wars seem to follow this principle where a mistakenly easy gain suddenly is transferred into a situation where all parties only can lose.
The takeaway is when you play-to-win, you must also be willing to lose, but ensure to lose just a small sum. This way you can afford to lose a couple of times before you eventually win and get well reimbursed for all the small losses you have made along the road. When you play-not-to-lose – try not to get carried away by avoiding to lose at “all costs.” You must constantly ask yourself if it what you are doing is financially sane, or if there are other investments that may give you a better reward.
By Bengt Järrehult
Bengt Järrehult is Fellow Scientist Innovation at SCA, a global hygiene products and paper company. He is also adjunct professor and visiting professor resp. at 2 departments of Lund University in Sweden. He is an avid reader of and presenter on the topics of innovation, especially on breakthrough innovation and the psychological hurdles that exist to achieve this, hurdles that we may or may not be aware of. He is of the opinion that most companies more or less know what to do to become more innovative. What they don’t know is what really hinders them from doing these measures…