February 14, 2022, 11:05 | Business
Every year, Professor Max Bazerman sells Harvard Business School MBA students a twenty-dollar bill well above face value. His record is selling $20 for $204, Ukr.Media informs.
And he does it like this: He shows the bill to the whole class and announces that he will give $20 to the person who will give the most money for it. True, there is a small condition. The person who was immediately behind the winner will have to give the professor the amount she was willing to give for $20.
To be clear, let's say the two highest bids were $15 and $16. The winner gets $20 in exchange for $16, and the second person will have to give the professor $15. Such conditions.
Trades start at one dollar and quickly reach $12 – $16. At this point, most of the students drop out of the auction, and only the two highest bidders remain. Slowly but surely, the auction approaches $20.
It is clear that it is no longer possible to win, but you also do not want to lose, because the one who loses will not only get nothing, but he will also be forced to pay the professor the face value of his last rates.
As soon as the auction crosses the $21 mark, the class bursts into laughter. MBA students, supposedly so smart, are willing to pay more than face value for a twenty dollar bill. Indeed, comically and very accurately describes the behavior of MBA holders.
The auction continues…
However, the auction continues and quickly reaches $50, then $100, and $204, Bazerman's record. for his teaching career. By the way, during trainings, the professor does the same trick with top managers and CEOs of large companies and always sells $20 above the nominal value (the money received is spent on charity).
Why do people always pay for twenty dollars more money, and what is the professor trying to show?
Man, especially in business, has a weak point – the fear of loss . Numerous experiments show that a person behaves extremely irrationally and even inappropriately when he starts losing money.
At first, all students think they have an opportunity to get free money. After all, they are not stupid and will not pay more than twenty bucks for a twenty-dollar bill. However, once the bidding reaches $12 – $16, the other person realizes that they are in for a serious loss, so they start bidding more than they intended until the auction reaches $21. At this stage, both participants will lose money. But someone will lose only a dollar, and someone will lose twenty. To minimize losses, each person tries to become a winner. However, this race only leads to both bidders losing more and more money, until the amount of losses reaches such an amount that it simply does not make sense to dig deeper.
Thus, the desire to get a free twenty turns into losses. Most interestingly, there is a wealth of data — especially in the stock market — that shows the Bazerman phenomenon in action. A person begins to lose money. Instead of recording a loss, she hopes to win back the loss – and almost always loses more.
So remember the lesson of the cunning professor – the fear of loss leads to big losses. Fix the losses while they are minimal.