Friday, August 14, 2009

Why would a Harvard MBA student pay $204 for a $20 bill?

Irrational Behavior Happens to the Best of Us.

Why would a Harvard MBA student pay $204 for a $20 bill?

Harvard Business School professor, Max Bazerman found a fail proof way to take money from Harvard MBA students. On the first day of his negotiations class, he waves a $20 bill in the air and declares he will be auctioning it off. There are only two rules to the auction: First all bids must be in $1 increments and, second the winner will walk away with the bill, but the runner-up must honor his or her bid leaving the situation empty handed.

As Professor Bazerman begins the auction, the MBA Harvard students are at the edge of their seats- anxious to make a cheap $20. The auction rapidly takes off as as hands are flying up throughout the classroom. Within no time the bid is up to $10 and climbing, around the $12 to $16 students notice the trend and the volume of bidding falls out completely till there are two bidders left.

Now one would think this shouldn't get too out of hand; these are intelligent business students that are going to change the world. However, neither wants to be out $16. So it goes on to $21, $22, $23, $50, $100 the record is $204.

Lesson? Loss aversion is a powerful force to recon with, as it beckons irrational behavior, be it in a classroom auction or when making important decisions such as choosing a college. By gauging your commitment and controlling your anxiety, you can prevent this from fogging up your decision-making perception! Fight loss aversion and help ease a college's decision to accept a student by encouraging them to Do a Project.

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