There have been a lot of famous game show questions over the years. “Would you like to spin the wheel or solve the puzzle?” “What would you bid on this dining room set?” “Is that your final answer?”
One question has been capturing the American public lately, a question which has implications beyond the game show and its host, Howie Mandel. That question, which is also the namesake of the show, is “Deal or No Deal.” Human Resource professionals should take the implications of what goes on in the game into account when they negotiate with their prospective and current employees.
Thierry Post, Martijn van den Assem, Guido Baltussen, and Richard Thaler studied the effects of “Deal or No Deal” in the television show and in the classroom. According to their findings: “Contrary to the traditional view of expected utility theory, the choices can be explained in large part by previous outcomes experienced during the game. Risk aversion decreases after earlier expectations have been shattered by unfavorable outcomes or surpassed by favorable outcomes. Our results point to reference-dependent choice theories such as prospect theory, and suggest that path-dependence is relevant, even when the choice problems are simple and well-defined and large real monetary amounts are at stake.”
This all sounds great, but what does it mean in plain English? And for which choice does Human Resources need to watch out?
“Most notably, risk aversion generally decreases after prior expectations have been shattered by eliminating high-value briefcases or after earlier expectations have been surpassed by opening low-value briefcases.”
This means that someone who would be risk averse will become more risk-seeking if their expectations are under or over the actual results. In a business negotiation sense, this would mean that an offer perceived as a “lowball,” or on the other hand, an offer way above the candidate’s expectations, will actually make the person more risk-seeking. If this holds true, then a candidate who values themselves at $40,000 a year and gets an offer of $20,000 will feel that they can negotiate in a risky manner and maybe lose the job before they’ll accept the lowball offer. Similarly, the same person who receives a $60,000 offer will try to turn this good fortune into an even higher salary, either with his or her current company or by leveraging that offer into a higher bid from another firm. If the study is correct, the person who is easiest to negotiate with is the one with expectations closest to the $40,000 offer.
After describing “Deal or No Deal” as an economist’s dream – because the game involves no skill at all and therefore does not differ due to skill level – Mr. Post described people’s actions in more detail for the Wall Street Journal: “That supports ‘prospect theory.’ Prospect theory holds that people evaluate prospects for gains and losses from psychological reference points that may shift over time (like an early setback) instead of seeking to maximize the ‘utility’ they receive from money under a rigid formula.”
In practice this probably makes sense. A person who gets an offer around what they think they are worth is much more likely to accept it, or at least will be less risky in their negotiating, knowing that you have aptly priced them in the market.
NPR radio explained last year that this happens because of people’s aversion to risk in general. When offered $50 or a coin flip at $100 or $0, they will take the guaranteed $50 or even $45, when their expected return in the original offer is the same in both instances.
The University of Pittsburgh Medical Center took the NPR study one step further and found that the part of the brain that looks for immediate rewards – as in taking lower offers – may be the part of the brain that is linked with addiction: “The preference for immediate over delayed rewards of larger value, which researchers term ‘delay discounting,’ has already been linked to impulse-control problems, such as substance abuse, addiction and pathological gambling.” While it may be considered quite rash to expect that someone who is negotiating for a signing bonus and a smaller overall salary is going to become a drug addict, this study does delve into the fact that looking at people’s habits in a “Deal or No Deal” situation can help determine certain aspects of their personality.
So how does a Human Resource professional act upon this? “Not all positions are suitable for risky behavior. On the other hand, some positions require the element of daring,” explains Jennifer Loftus, National Director of Astron Solutions. “Human Resource professionals must thoroughly understand the positions for which they’re hiring to ensure sourcing of the best suited candidate.” One way to effectively source could be by asking a simple expected returns question to an interviewee. If it’s a position where you are looking for someone who will shoot for the top, then look for the person who takes the coin flip at $100. If this is going to be a person, let’s say, giving out loans at a bank, you may want to find the person who will take the $50, because they may be more prone to avoiding risks. Even a simple task such as letting the candidate play a round of “Deal or No Deal” and watching their behavior can tell you a lot about their tolerance for risk. Because when it comes down to risk preference at work, you want to know what your future employee is going to answer when they’re asked “Deal or No Deal?”
Deal or no Deal: The All or Nothing Mentality in Negotiations - To learn more about this author, visit Jennifer Loftus's Website.
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Jennifer Loftus
(Visit Jennifer's Website)
Astronology utilizes a number of authors,
each with their own fields of interest and
expertise. The authors are all associated
with Astron Solutions.
A bit about Astron Solutions:
Astron Solutions is a New York-based
consulting firm dedicated to the delivery
of human resource consulting services and
supportive technology. We work nationwide
to develop and implement human resource
programs that support the strategic
direction of organizations through the
creation of a positive employee relations
environment.
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