Priceless: The Myth of Fair Value (and How to Take Advantage of It) (33 page)

Which contract do you prefer? Shafir, Diamond, and Tversky offered these choices in a survey. They found that their survey group was split between the two options, with 46 percent choosing A and 54 percent choosing B. The psychologists also found that they could change the responses drastically just by changing the way they described the two contracts—a finding that “could have significant consequences for bargaining and negotiation.”

The descriptions above were worded to be as neutral as possible. Another group received the same problem with the contracts framed in “real” (inflation-adjusted) terms:

Contract A: You agree to sell the computer systems (in 1993) at $1,200 apiece, no matter what the price of computer systems is at the time. Thus, if inflation is below 20% you will be getting more than the 1993 price; whereas, if inflation exceeds 20% you will be getting less than the 1993 price. Because you have agreed on a fixed price, your profit level will depend on the rate of inflation. Contract B: You agree to sell the computer systems at 1993’s price. Thus, if inflation exceeds 20%, you will be paid more than $1,200, and if inflation is below 20%, you will be paid less than $1,200. Because both production costs and prices are tied to the rate of inflation, your “real” profit will remain essentially the same regardless of the rate of inflation.

When things were put this way, the group overwhelmingly (81 percent) preferred B. This version makes the case that B guarantees a real profit, while A is a gamble.

Still another group got the same contracts described in dollar-value terms—so as to promote the money illusion:

Contract A: You agree to sell the computer systems (in 1993) at $1,200 apiece, no matter what the price of computer systems is at the time.

Contract B: You agree to sell the computer systems at 1993’s price. Thus, instead of selling at $1,200 for sure, you will be paid more if inflation exceeds 20%, and less if inflation is below 20%.

This wording paints A as a sure thing and makes B look like a gamble. Here, 59 percent favored B. According to Shafir’s group, this implies two things. One is that people “naturally” look at things in dollar-amount terms. The reaction to the “neutral” question was not much different from that to the version slanted in favor of the money illusion.

The other conclusion is that choices are remarkably fluid. Loss aversion is a powerful motivator. People will pay more to avoid risk and (so
the experiment suggests) will also pay more for mere
words
that downplay risk.

Shafir, Diamond, and Tversky argued that people tend to accept whatever framing they’re given. Union leaders wanting to sell a contract to the rank and file—or management wanting to sell a proposal to the union—should think carefully about how they describe the offer. The trick is to present the contract as minimizing risk. This is possible regardless of what the contract actually says.

• If the contract calls for a wage increase to $20 an hour, the pitch should be that it
guarantees
$20 an hour. An adjustable wage would carry the risk of making less than $20 an hour, or even a cut in wages.

• If it calls for a 3 percent yearly raise, say it
guarantees
that raise. Wages are certain to go up, and you don’t have to worry about deflation, which would cause wages to decrease with an indexed contract.

• And if the contract indexes wages to the cost of living, as Irving Fisher thought all sensible contracts should, then you can say it
guarantees
the only thing that really matters, purchasing power. Ironically, it’s most important to hammer this point with the indexed contract. The survey indicates that people don’t adopt this frame unless it’s presented to them.

Marketers exploit the power of inflation all the time. Internet marketing guru Marlene Jensen advises clients to use this cleverly larcenous tactic. Say you’ve got a $100 product. You don’t sell it for $100, goodness no. It’s $149 discounted to $99. As time goes by, inflation nibbles at your profit and you have to raise the price. Jensen advises,
Don’t raise the price—lower the discount.

The official price, which nobody pays, remains $149. But now you discount it to $119. For a lot of things, like newsletter subscriptions, many customers won’t notice. They won’t remember the old price, and they haven’t a clue what the product should be selling for. Instead, they’ll fall for the lure of getting a $149 product for “only” $119.

That’s half of Jensen’s scheme. More time passes, and inflation never sleeps. You tell your customers that, in view of increased costs, it will be necessary to raise prices, from $149 to $179.
But
for selected customers (meaning basically everyone), you’re increasing the discount so that they pay not a penny more than they did before, $119. Nobody can object to this. The price paid remains the same.

This lays the groundwork for the next ratchet upward. Eventually, you go back to the customers and decrease the discount—while holding the line on the official price. Repeat as needed.

Jane Beasley Welch picked up the extension phone and heard a lot more than she wanted to hear. Her husband, Jack Welch, the recently retired CEO of General Electric, was talking to a strange woman. Jane quietly put down the phone. She confirmed her suspicions by reading messages on Jack’s BlackBerry. The biggest shock came when Jane confronted her husband. He didn’t deny an affair or softpedal it. He had fallen in love with Suzy Wetlaufer, forty-two, with the looks and bearing of a model. Wetlaufer was editor of the
Harvard Business Review
. The magazine had asked to do a profile of Jack and he consented. Welch had no idea that he was walking into “the most expensive tryst in history.”

Two teams of divorce attorneys were soon bickering over quite different estimates of the Welches’ net worth. Jane’s lawyers put it at $800 million (and wanted half); Jack’s team said it was only $456 million (and were offering Jane less than 30 percent). As negotiations dragged on, Jack was giving Jane a temporary allowance of $35,000 a month. To a woman with Jane’s sense of entitlement, that didn’t go far. It was time for Jane to play the ultimatum game.

The summer of 2002 was abuzz with talk of greedy, grabby CEOs. Scandals were unfolding simultaneously at Enron, WorldCom, Tyco, and Adelphia. On June 14, corrupt Tyco CEO Dennis Kozlowski threw a fortieth birthday bash for his wife, Karen. Guests were flown to Sardinia for a “Roman orgy” featuring toga-clad waiters, a cake in the shape of a nude woman, and an ice sculpture of Michelangelo’s
David
urinating a never-ending stream of Stolichnaya vodka. Kozlowski called the party a
shareholders meeting and used that pretext to bill Tyco for one-half of the $2 million cost. Within weeks, this and other scandals had made Kozlowski a pariah who had little choice but to resign. The irony was that Kozlowski had often been likened to Welch—at the time, about the highest praise one could bestow on a chief executive officer. To those who skimmed the business section, Jack Welch was the last unscathed CEO left, the one man whose probity and plainspoken candor were still unquestioned.

Jane Welch had the power to change that. She knew that Jack was receiving an astonishing array of perks from GE, unknown to shareholders or the press. For instance, GE had agreed to supply Jack with an $80,000-a-month Trump Tower apartment throughout his working life
and
retirement. Jane’s attorneys told her she could demand use of the apartment, just as if it were an asset of Jack’s. Jack had a lot of perks like that. Her attorneys grilled Jane on them and compiled an affidavit with multicolored charts.

This became a crucial bargaining chip. In that year of corporate scandals, release of the information would knock Welch off his pedestal (at the very least) and might compel him to relinquish the perks. The demand was,
Give me a fair share of the perks or nobody gets them.

Jack Welch was very much part of the GE tradition of ultimatum bargaining. He had acquired the nickname “Neutron Jack” for his practice of firing the 10 percent of worst-performing managers. Jack destroyed humans while leaving the building standing. But if he thought that Jane was bluffing, he was wrong.

Jane’s attorneys filed the affidavit on September 5. Its details were all over the next morning’s
New York Times
. The story was no longer an A-list divorce but the polymorphous perversity of Welch’s compensation package. Welch’s GE pension, some $8 million a year, was about double what his top salary had been. This was for doing absolutely nothing. Welch was also consulting for GE, and for that he received an $86,000-a-year salary in perpetuity.

The salary was a bagatelle next to the perks that Welch retained for life. These included free use of a corporate Boeing 737 complete with free pilot and free fuel. GE sprang for prime seats at Red Sox, Yankees, and Knicks games; paid Welch’s tab at restaurants; paid for cars, cell phones, fresh flowers, dry cleaning, wine, and vitamins. The real mystery
was how Welch would spend his $8-million-a-year pension. “It appeared that he had negotiated a retirement plan,”
The New York Times
’s Joseph Nocera wrote, “that would cause him to never take cash out of pocket to pay for anything.”

Jack, furious over the disclosure, was soon being compared to Dennis Kozlowski—and this was not a compliment. Barely ten days after Jane’s exposé hit the news, Jack caved in to the torrent of criticism. He announced that he was relinquishing all his GE retirement perks. By one calculation, Jane’s ultimatum had cost the couple $2.5 million a year for the rest of their lives.

It was a T-shirt that sparked Sara Solnick’s interest in gender and bargaining. As a young economics student she signed up for a summer institute sponsored by Daniel Kahneman and Richard Thaler. There she came across T-shirts asking “Does
Homo Economicus
Exist?” “They critiqued the existing models of economic man, but they still thought it was a
man
,” Solnick recalled. “I said, this person’s identity also makes a difference.”

Solnick had studied labor economics and knew that one of the field’s puzzles was the gender gap. It had long been known that women earn less than similarly qualified men, even after allowing for every obvious factor that might distort the results. After Solnick learned about the ultimatum game, she reasoned that it could address the role of gender from a new angle. She wondered whether there would be gender differences even in the game’s minimalistic simulation of price setting. Solnick’s advisor told her it was a good research topic because it would be interesting whichever way it turned out. She applied for a $5,000 grant and set to work.

In Solnick’s clever design, proposers and responders sat on opposite sides of a partition and could not see each other. A control group of players learned only the code number of their unseen partners. Another group learned the first name of their partner. Everyone in the second group must have been aware of their partner’s gender, yet nobody knew the experiment was “about” gender. (A few subjects had gender-neutral names like “Casey” or “Jordan.” Their results were not counted.)

The proposers who didn’t know the gender of their partner offered an
average of $4.68 out of $10. But for the proposers who knew their partner was a man, the average offer was $4.89. When they knew they were dealing with a woman, the average was only $4.37.

One conceivable explanation is that everyone expects men to be vindictive jerks and women to be doormats. In any case, the gender gap was even greater when the proposers were women. Females offered male responders an average of $5.13—more than a fifty-fifty split—yet stiffed female responders with an average of $4.31. Either the women were more generous with men, or more afraid of making them mad. One female proposer gave the full $10 to her male partner, something that almost never happens, even in New Guinea. Her explanation: “I want at least one of us to get something.”

Solnick had her responders state the minimum offer they would accept. This minimum was higher when they knew the proposer was female. Women got the short end of the stick no matter which role they played.

Terms like “sexism” are probably misleading here. Solnick’s subjects were students at the University of Pennsylvania, too young to remember a prefeminist past. Though they might have consciously rejected a double standard (just as anchoring subjects deny being influenced by random numbers), gender made a difference. The mere mention of a name triggered an unconscious pattern of gender behavior, measurable in dollars.

Overall, the male proposers in Solnick’s study made about 14 percent more money than female proposers did. That is close to reported figures for the gender gap in real-world wages. Salaries are negotiated, Solnick noted, and “women may end up with a smaller share of the portion of wages that is up for grabs.”

These are disturbing findings for our would-be egalitarian society. “Equal pay for equal work” can be a tricky concept when individuals negotiate their salaries. What is to be done if employers, male and female, unconsciously quote lower salaries to women—and women accept them? Solnick has found that many employers are remarkably unconcerned. One common reaction to her research from employers is: “If women take our first offer, too bad for them. The men bargain and got a better starting salary.”

There is of course a difference between equality of opportunity and
equality of outcome. Everyone’s for equality of opportunity. In the main, we prefer to think that equality of opportunity leads naturally to equality of outcome. Solnick’s research challenges this hopeful thinking. “If you really want to be fair,” Solnick said, “you can’t just assume that you are fair. You have to have procedures in place.”