Wednesday, March 30, 2011

The Problem(s) with Fairness, part 1

We often make appeals to fairness.  It's a universal concept, something virtually every person understands and respects.  Unfortunately it's also quite dangerous to invoke.

The first problem with fairness is that it's not nearly as objective as we think it is.  Take a simple question like, "If someone sues someone else and loses, should they have to pay the defendant's legal costs?"  This is an appeal to fairness and not everyone will agree.  But what's really amazing is that many people hold both answers to be true!  How can this be?

In 2005 U.S. News and World Report asked people one of the following questions:

"If someone sues you and you win the case, should he pay your legal costs?"  85% of people answered yes.

"If you sue someone and lose the case, should you pay his legal costs?"  44% of people answered yes.

These questions are virtually identical.  Each corresponds with, "If someone sues someone else and loses, should they have to pay the defendant's legal costs?"  But simply because we're placed in one role in one version and another role in the other, we're likely to see things differently.  If I'm sued, then certainly it's fair that he pays my costs if I win.  After all, it was probably frivolous.  But if I sue someone else and lose I shouldn't have to bear their costs.  That would make it too dangerous for someone with a legitimate but uncertain case to go to court!  Four out of ten people change their minds on what seems like such a fundamental principle of fairness, and I bet most of the rest were less sure of their answer depending on which role they were in.

This question of bias came up for me today.  We were negotiating an interesting case in which one firm had developed a valuable technology but could only get full value out of it by partnering with a sister firm (owned by the same parent company).  Their corporate rules were decentralized which meant that the two firms would have to negotiate any deal.

There were all sorts of ways the deal could be structured and it was clear that choosing the right structure would make a big difference in how much money there was to divide amongst us.  My group came up with an interesting idea.  Since we high a high level of trust with our counterparts, we would propose full disclosure of all information in order to achieve the largest amount of value.  Then we would split the value created by the deal equally.

But how much value was that?  It seemed to me that there was an obvious answer.  As the owners of the technology, we had a value on our own of $50 million.  The value created by the deal was therefore the total value after the deal less the $50 million we had at the start.  (Their BATNA was worth $0.)  My team agreed.  When we met with our counterparts it turned out that they had had the same basic idea -- full disclosure and an even division -- although they hadn't clarified in their own thoughts what was being divided.

I explained our view of what should be considered the value created by the deal and after going over it they agreed.  We quickly identified the best possible deal, which led to a total value of $150 million.  They got $50 million ($50 million more than they had at the start) and we got $100 million (also $50 million more than at the start).  We were all happy.

When we got back to class, however, we noticed that most of the other groups had split the value of their deals more evenly.  In fact, if anything the balance of division seemed to favor the other company.  Each group had looked at the situation very differently and come to quite different conclusions about what was fair.

One of my HBS professors from my MBA days said that fairness meant nothing more than, "I like it."  I disagree.  I think fairness is something we all value and that when you say to me, "That's not fair," we both understand what you mean by that.  But one thing we should always remember is that what you think is fair and what I think is fair will often be quite different.  We know what fairness is but we don't necessarily know what is fair.

1 comment:

  1. Would you then conclude that a key point of the negotiations must come down to the fundamental question of agreeing on terms, including the ever-popular, though highly divergent "fair"?

    The one point I'm really taking away from what I've read so far is that "value" (as opposed to "Values") is a subjective notion, and that we can seek synergistic results in negotiations that are more like "1 + 1 = 3...or more"