Apr
9
Why Generosity Creates Wealth Day 1: A Negotiations Class Exercise
Filed Under Career, Conciousness, Entrepreneurship, Health, Money, Motivation & Purpose, Relationships, The Bigger Perspective | 3 Comments
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As I racked my brain, it occurs to me that this isn’t the first time the taking less than your fair share concept has been encountered! It had made its first appearance in a negotiations class that I took in college.
The Negotiations Situation
Imagine there are three research companies A, B, and C. Because they’re in such an important field, the government is giving them a grant, but it’s structured a bit strangely! The companies are presented with the being able to pick only one of the following options:
Company A+B = $600,000
Company A+C = $800,000
Company B+C = $1,000,000
Company A+B+C = $1,100,000
Pretend you are one of the companies, what is your strategy to maximize your returns?
A Company Value Analysis
Because the government grants contracts to each pair of companies, each company has a certain value in the government’s eyes:
Company A = $200,000
Company B = $400,000
Company C = $600,000
You can do a quick check to see that these add up to the totals for the contracts above!
Of course this means that any of the companies can work with any of the other companies and come to this theoretical value for the deal. For example, Company A can work with Company B or Company C to get their $200,000 fair share. Or, the three of them can work together and split the $100,000 difference somehow ($200k + $400k + $600k = $1.2 mil, which is $100k more than the $1.1 mil offered by the government!)
So what’s the deal that should result?
A Loop For The 50-50 People
This is an interesting situation that presents a loop to the 50-50 people, assuming that everyone is going for these theoretical company values. Company A can offer Company B $400,001 and only take $199,999 to try to get the deal. However, Company C can in turn offer Company A $200,001 while Company C takes $599,999. Knowing that offer though, Company B might offer Company C $600,001 while Company B takes $399,999. But then Company A can….
This situation just never made sense to me in college. Wouldn’t the loop just go on forever and ever?
As I asked this question, the results for the class came in and a variety of deals developed. Some with Company A taking $150,000 and Company B taking $450,000. Some with Company B taking $380,000 and Company C taking $620,000. Some with Company A taking $210,000 and Company B taking $390,000. It all seemed so random!
The part that just kept bugging me was, why would Company B choose to take $390,000 when Company C is probably offering him $400,001? Wouldn’t it make sense to switch over to Company C’s deal?
Think about the situation for a second… what would you do?
How The Solution Makes Sense In The Context Of Generosity
After an hour or so of talking with the professor and my classmates, the answer to the burning question of “What does Company B get in exchange for that $10,001 difference?” finally emerged. It is… the deal! That’s right – by taking $10,001 less, Company B was able to secure the deal!
For some people, they’d probably much prefer to be in the situation where Company B took $450,000 and Company A took $150,000. However, in the long run, it might actually be better to be taking the $390,000! By taking $390,000 as opposed to going for the $450,000, Company B significantly increases the chance of getting the deal! Besides, life is a series of such “free” pies that are created. That $10,001 can bring a lot more of those!
Even from the perspective of the deal at hand though, by getting a deal, Company B gets $390,000 extra. By losing the deal, it gets nothing. It only needs to increase its chance of getting the deal by 1/400 in order for that $10,001 “loss” to be justified! This is not to mention the goodwill Company B would get from Company A by giving that $10,001. If such a situation arises again in the future, Company A might just go straight to Company B and not even talk to Company C! That’s what generosity does for you!
However, do note that this tradeoff does level off at some point. For example, if Company B only took $10, either the other companies would pretty much accept immediately. In this case though, it’ll need a lot more deals to make up for the $399,990 it missed out on!
This is not to say that’s necessarily a bad choice, as maybe it knows that there’ll be a $10,000,000 grant next year that it’ll need the goodwill of the other company.
Either way though, the main take away is that less than $200k/$400k/$600k may be the optimal choice for each of the respective companies!
The Solution When Everyone’s Generous
There is that special option where all three companies get some money though. However, it requires that the three companies each give up something and not get their “full” amount. It is a perfect example of how everyone benefits if they are generous! If each of the company is slightly more generous than 50-50, then they’ll all feel great accepting that slight loss so that everyone can be happy!
In the end, if they all cooperate and give a little extra, they get a bigger pie to share. If they do not, then they’ll have to fight over a smaller pie and one of them gets nothing! Not a bad reward for cooperating right?
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