Fairness and Over-Valuing

Today we will talk about two behavioural economics concepts: fairness and valuing what we own.

Fairness

In the ultimatum game, a player is given $10. This player must anonymously give a portion of the money to the second player. If the second player accepts the ‘offer,’ both parties keep their part of the money. If player two rejects the offer, neither player receives anything.

An interesting thing happens during the ultimatum game: sometimes, the first player will provide a 50/50 split because this seems fair. But if player one offers less than 20% of the $10, player two will reject the offer. Rejecting the offer is irrational because if someone offered you $2 for free, you should take it even if you know that they are getting $8 for free at the same time.

We often fall prey to the fairness thinking in our everyday project work. We may decide that because we aren’t allocated the same budget a big budget for our project, we will withhold advice to another department on their better-funded implementation project. In reality, receiving any money for our project, and being able to shape strategy on other systems within the organization are both high-influence platforms that we can take advantage of for the organization’s benefit.

As an independent consultant, I’ve fallen into the fairness trap when I haven’t lowered my quote to gain work because I felt that it wasn’t ‘fair’ that an organization would get the work for cheaper than a larger company would. In reality, I was like the second player: rejecting an opportunity to make an impact for the benefit of an organization and receiving nothing for doing so. The organization and I walked away, losing something that could have been amazing.

Over-Value

A second trap that we fall into is over-valuing what we have. Commonly known as the endowment effect, we see from behavioural economics that we will pay someone else less for an object than we would sell it for it we owned it.

If you were to buy a mug, you would value it at $5, but if you own the same mug, and are going to sell it, you will value it at $7. You can read about the endowment effect in this article.

Why does the endowment effect matter in our projects? Because it can affect how you allocate resources.

You may value the work that a team member from another team. You may be willing to provide a budget transfer to that department for the person’s expertise and 160 hours of their time. Your budget transfer seems reasonable to you, but to the manager of the department to whom the person ‘belongs’ will feel that the person is much more valuable than you do. The manager may describe it as an intangible value (for example, ‘they know our processes so well, and now we’ll have to train someone else.’) But in reality, the person is valued more because they are part of the department. The feeling of value is a good thing because people feel valued by their own department. But it can be difficult to decide on how to allocate people and resources objectively.

Over-valuing may also occur with your own time. You may feel that each hour of your work might bring more value to the organization than another observer. Because your time and work belong to you, you inherently believe that it brings a great deal of value. If we were to pay someone else for the work that we do, we would expect to pay much less than we want to ‘charge’ the departments that we are working for.

Be aware of the concepts of fairness as demonstrated in the ultimatum game, and the endowment effect that can keep us from having a true understanding of the value of our work. Knowing about these two theories from psychology will help guide you away from making decisions that are skewed because you are making decisions based on an incorrect perception of value.