Tuesday, October 25, 2011

Courting bad behavior

The other night I was watching Storage Wars and saw an unhappy but predictable bit of value destruction play out.

For those not familiar with the show, kudos on having better taste than I do the basic setup is as follows.  Property that has been in private storage gets auctioned off when the owners fail to pay rent on their unit.  Storage Wars focuses on four men who try to make a living bidding on the contents of the units.  The bidding is complicated by the fact that the storage managers only open the front door to the unit; bidders can't go inside or open boxes, so they have to garner what information they can from a very limited viewing.

In this episode, nine lots from a single owner were being auctioned.  The most experienced bidder (Dave, nicknamed "The Mogul" on the show) looked in the first unit and realized that the semi-random pieces of metal it contained were part of an expensive stage lighting system.  He guessed (correctly) that the other units each contained part of the overall system; the whole was worth much more than the sum of the parts.

Dave decided to try to buy all nine units up for auction.  Most likely he reasoned that if no one else realized what was in them they wouldn't see the value and he could outbid them and still make money.  Moreover, if someone did realize what was in them, then once he bought the first unit he'd still have an advantage, since he could complete the system while a rival bidder's best hope would be to get part of it.

The snag in his plan soon became apparent.  One other bidder, Darrell, understood what was going on and waited until Dave had invested a lot of money buying several lots.  He then began to bid aggressively, starting with a lot he suspected had a particularly key component -- the control system.  Dave, likely realizing that if he forced the issue on this lot he'd have to keep doing so on the rest, let the lot go after the bidding had gone high enough.

After the dust settled, it seemed that Darrell's gambit had worked.  He did indeed have a central component to the system.  He'd bought it for around $1200 and it would cost Dave $5,000 to replace.  He offered to sell it to Dave for $3,000.

Dave refused, saying, "I'd rather die than see you make a buck."  Instead, Dave sold what he bought as scrap metal, letting him make a profit albeit a much smaller one than he could have made.  A lot of value was destroyed.

So what happened?

First, a disclaimer.  Storage Wars is a TV show.  The incentives are almost certainly distorted by the fact that the players are paid and drama is encouraged.  That aside, this sort of dynamic plays out in competitive negotiations so let's treat it as real and unscripted.

The math on Darrell's gambit was flawed in one key respect -- it looked at this deal in isolation.  He was correct in assuming that he could force Dave to let him have one of the units (in order to prevent this, Dave would have had to pay a premium for every single unit remaining), but his assumption that Dave would then buy that unit back from him only makes sense if this is the only time these two are competing.  Since Dave knew there would be plenty of other opportunities for Darrell (and others) to try to hold him up in the future it could be rational for him to take a loss today in order to signal that he would retaliate against anyone trying to do so.

Darrell also magnified the likelihood that Dave would fight back by trumpeting what he was doing during the auction.  He crowed about how he'd blocked Dave's plan and was going to make Dave pay him.  Not only might this have made Dave angry it increased the signal value (or cost) of Dave's decision.  If he paid Darrell then all the other bidders would have been on the lookout for a chance to do something similar.

Darrell's chance of success would have been much higher if he took a different approach.  He should have bid on that unit without giving any indication that he knew what Dave was up to, instead indicating that he thought he saw something collectible in it.  Then, when the dust settled, he could have approached Dave and said, "That unit I bought had a control panel that's a key component to the system you put together from the other units.  It retails for five grand, but I wasn't buying it to screw you so I'll sell it to you for three."  Dave might still have refused, but he would have had better incentive to negotiate.  Instead, Darrell took completely unnecessary effort to make Dave angry and to create incentives for Dave to refuse to deal with him.

Yesterday I was in a meeting for a multi-party negotiation that has become quite contentious.  One of the parties accused another party of lying on a key issue for a period of several months.  I think the first party had some grounds for complaint and even for suspicion but it's very rare that calling someone a liar is constructive.  In this case it was particularly self-destructive because the latter party has nearly all of the power in the negotiation.  They'd like to reach a mutually-acceptable agreement but if none can be reached they are in a position to go ahead with what they want.  Calling them liars encourages them to be defensive about legitimate complaints and encourages them to shut off potentially constructive paths to dialogue.

In each case, the lesson is largely the same.  Negotiators need to think about how counterparts will react to their words and actions.  If you've pulled off a maneuver that benefits you at someone else's expense, the last thing you want to do is trumpet it!  If you want to voice criticism of the other party's behavior, think carefully about how you express it.  There's a big difference between, "There have been some important pieces of information that weren't communicated clearly; how can we improve this going forward?" and "You've been hiding information you knew we needed."

Negotiation is about getting other parties to do things that are in your interest.  Like a doctor's first rule is to do no harm, a negotiator's first rule should be never to cause others to act against our interests.


  1. Dave Hester was a fool to let Darrell obtain the storage unit with the key component. He had every bit as much information going in about what was in that unit as did Darrell, and he should have fought for that particular unit, knowing that the control system was the one indispensable element in the whole shebang. So what if Sheets gets some other crate, full of the connectors (otherwise known as "scrap aluminum")? I watch the show religiously, I have impeccable taste, and I know a Dave Hester screw-up when I see one. Furthermore, Barry Weiss is in no way attempting to make a living at these endeavors. He is a retired produce seller, and a friend of the show's producer, who was invited to join the cast and fight the others for "collectibles."

  2. I think it's possible Dave didn't realize that that unit had the control panel. If he did, then I agree with you, but if not then the math of fighting for the whole package is very bad once someone is trying to screw him.

    I don't know Barry's story, but it's pretty clear that someone who arrives in a new crazy vintage car almost every episode isn't trying to make a living off of storage locker auctions.