Economists Do It With Models

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Is “Being Pathetic” The Newest Negotiation Tactic?

September 28th, 2009 · 4 Comments
Behavioral Econ

According to Scott Adams, it very well might be:

I’ve posted before about companies using the recession as an excuse to cut perks, regardless of whether the company itself was/is substantially affected by the economic conditions. The basic principle is that the companies can get away with it more because people’s perceptions of fairness depend on how they view the financial situation of the company making the decisions. As before, consider the following survey question as reported in “Fairness as a Constraint on Profit Seeking: Entitlements in the Market”:

In the context of the economic downturn, subjects were asked the following:

Question 9A: A small company employs several workers and has been paying them average wages. There is severe unemployment in the area and the company could easily replace its current employees with good workers at a lower wage. The company has been making money. The owners reduce the current workers’ wages by 5 percent.
Acceptable: 23%
Unfair: 77%

Question 9B: …the company has been losing money. The owners reduce the current workers’ wages by 5 percent.
Acceptable: 68%
Unfair: 32%

The corollary to this evidence would then be that a company is in a better negotiating position if it “needs” to do something to stay afloat rather than just wants to do it in order to be more profitable, since people don’t seem to question a firm’s right to survival, even at the expense of others. Perhaps Hyatt should have thought to use this strategy.

Tags: Behavioral Econ

4 responses so far ↓

  • 1 Mitch // Sep 28, 2009 at 6:13 pm

    Yay, quantitatively investigating perceptions of fairness! In 1986?! I didn’t know econ-psych experiments went back that far. Then again, I see that Thaler is one of the authors.

    Cool post.

  • 2 econgirl // Sep 28, 2009 at 8:07 pm

    Yep! From Dan Kahneman’s wikipedia page:

    Kahneman and Tversky were both fellows at the Center for Advanced Studies in the Behavioral Sciences at Stanford University in the academic year 1977-1978. A young economist named Richard Thaler was a visiting professor at the Stanford branch of the National Bureau of Economic Research during that same year. According to Kahneman, “[Thaler and I] soon became friends, and have ever since had a considerable influence on each other’s thinking” (Kahneman, 2003, p. 437). Building on Prospect theory and Kahneman and Tversky’s body of work, Thaler published “Toward a Positive Theory of Consumer Choice” in 1980, a paper which Kahneman has called “the founding text in behavioral economics” (Kahneman, 2003, p. 438).

    There’s a compilation of academic papers published as a text entitled “Choices, Values and Frames” (edited by Kahneman and the late Amos Tversky) that shows the progression of early thought in the discipline. From this, it appears that the first experiments to look at loss aversion and framing and such took place in 1979 or 1980. I think it just took a while for mainstream economists to pay attention. 🙂

  • 3 econgirl // Sep 28, 2009 at 8:10 pm

    P.S. Here’s a nice graphical timeline of the evolution of behavioral economics:

    http://www.economistsdoitwithmodels.com/2009/05/08/in-case-you-are-curious-as-to-what-it-is-that-i-study/

  • 4 Hank // Sep 28, 2009 at 8:31 pm

    We saw this before the recession hit as well when companies tried to blame all of their troubles on rising fuel prices.

    And, this study also shows that there is a fine line between employees “buying in” that their actions do affect the bottom line of their employer and how much information the firm should actually share with employees. If this were a real case, as a manager, I just might not share how well the company is doing financially with my employees if I wanted to lower their wages.

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