How to sell $ 20 for 200?

How to sell $ 20 for 200 or a beautiful "Divorce" from Professor Harvard

Each year, Professor Max Bazerman sells an MBA to Harvard Business School students a twenty-dollar bill much higher than par. His record is selling $ 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 her 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 he was willing to give for $ 20.

To make it clear - suppose the two highest bid was $ 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.

Bidding starts with one dollar and quickly reaches $ 12- $ 16. At this point, most students fall out of the auction, and there are only two people with the highest bids. Slowly, but confidently, the auction comes to $ 20.

It is clear that it is impossible to win, but you do not want to lose either, because the loser will not only get nothing - he will still have to pay the professor the value of his last bid.

As soon as the auction reaches the threshold of $ 21, the class explodes with laughter. MBA students, supposedly so clever, are ready to pay a twenty-dollar bill above par. Indeed, it describes the conduct of MBA holders very accurately and very accurately.

However, the auction continues and quickly reaches $ 50, then up to a hundred, down to $ 204 - Bazerman's record for his teaching career. By the way, during the trainings the professor does the same trick with top managers and CEO of large companies - and always sells $ 20 above the nominal value (the money is spent on charity).

Why do people always pay twenty dollars more for money, and what does the professor try 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.

Initially, 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, once the auction reaches $ 12- $ 16, the second person realizes that he is facing a serious loss, so he begins to beat more than he intended, until the auction reaches $ 21. At this stage, both participants will lose money. But someone will lose the whole dollar, and someone will lose twenty. To minimize losses, each person tries to become a winner. However, this race only leads to the fact that both participants of the auction lose more and more money, until the amount of loss reaches such a level that it is simply useless to dig a deeper dig.

Thus, the desire to get a free twenty is a loss. The most interesting thing is that there is a lot of data - especially in the stock market and in the casino - which show the Bazerman phenomenon in action. A person begins to lose money. Instead of fixing the loss, he hopes that he will be able to win back the loss - and almost always loses more and more money.

So remember the lesson of the crafty professor - the fear of losses leads to great losses. Fix losses as long as they are minimal.