The Bazerman effect - greed makes people poorer

Every year, Professor Max Bazerman sells a $ 20 bill to MBA students at Harvard Business School, well above par. His record was a sale of $ 20 for $ 204. And he does it as follows.

He shows the bill to the whole class and says that he will give $ 20 to the person who will give the most money for it. However, there is a small condition. The person who was immediately behind the winner will have to give the professor the amount that he was willing to give for $ 20.

To make it clear - let's say the two highest bids were $ 15 and $ 16. The winner receives $ 20 in exchange for $ 16, and the second person will have to give the professor $ 15. These are the conditions.

Trades start at one dollar and quickly go up to $ 12- $ 16. At this point, most of the students drop out of the auction, leaving only the two highest bidders. Slowly but surely, the auction is approaching the $ 20 figure.

It is clear that it is no longer possible to win, but one does not want to lose either, because the loser will not only receive nothing - he will also have to pay the professor the denomination of his last bid. As soon as the auction goes over the $ 21 milestone, the class bursts into laughter. MBA students, ostensibly so smart, are willing to pay for a twenty-dollar bill above par. Really comical and very accurate describes the behavior of MBA holders.

However, the auction continues and quickly goes up to $ 50, then up to $ 100, up to $ 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 par (the money received is spent on charity).

Why do people invariably pay more for twenty dollars, and what is the professor trying to show? A person, especially in business, has a weak point - loss aversion or fear of loss. Numerous experiments show that a person behaves extremely irrationally and even inadequately when he begins to lose money.

At first, all students believe that they have the 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, as soon as the auction reaches $ 12- $ 16, the second person realizes that he is facing a serious loss, so he starts bidding more than he intended until the auction reaches $ 21. At this stage, both participants will lose money. But someone will lose only a dollar, and someone twenty. To minimize losses, each person tries to become a winner. However, this race only leads to the fact that both participants in the auction lose more and more money until the size of the losses reaches such an amount that it simply does not make sense to dig a hole 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 and in casinos - that show the Bazerman phenomenon in action. The person starts to lose money. Instead of fixing the loss, he hopes that he can win back the loss - and almost always loses more and more money.

So remember the lesson of the cunning professor - fear of loss leads to big losses. Record losses as long as they are minimal.