Understanding cost

Lecture handout: Understanding cost*

Textbook Reading: Chapter 2 (Intro and Section 2.4, pp. 39-34 and 59-63)

The aim of this session is to understand the economic concept of opportunity cost.

Group activity:

  • Malhotra, Deepak, 2005, “Hamilton Real Estate: BUYER”, Harvard Business School Case No. 9-905-052 (£)
  • Malhotra, Deepak, 2005, “Hamilton Real Estate: SELLER”, Harvard Business School Case No. 9-905-053 (£)

In Patrick McKenzie’s infamous blog post on salary negotiation, he says: “Every handbook on negotiation and every blog post will tell you not to give a number first.  This advice is almost always right. ”

I recommend the following Lex Fridman interview with FBI hostage negotiator Chris Voss. Voss talks about the three “voices” of negotiation, which are:

  • Assertive (loud and clear commands, direct and honest but recipients can feel attacked and not engage well)
  • Accommodative (smiling, optimistic, hopeful – relationship building)
  • Analyst (likes decision trees, systematic thinking, fact driven, and quite introspective. They recognise that accommodators often get better deals than assertives)

He also makes clear that lying is usually a bad idea, for the following reasons:

  1. If the other side are a better liar than you they’ll notice straight away
  2. It could be a trap to see if you’re willing to lie
  3. It’s likely that the other side will find out it was a lie, and then they will treat you much worse

I believe that the case discussion demonstrates our inherent reluctance to lie. However:

Here is a more recent example of obtaining copyright for the use of a photograph:

In the debrief it’s important to realise when someone is being evasive. A good example of this is in the U.S. version of The Office, where Andy has to repeat the same question to Angela 3 times before he gets to the truth. (Season 5, Episode 12, from 9:22 – 10:13).

Recommended article:

Recommended cases:

  • Desai, M.A., and Ferri, 2006, “Understanding Economic Value Added”, Harvard Business School Case No. 9-206-016
  • Desai, M.A., Egawa, M., and Wang, Y., 2004, “Continuing the transformation of Asahi glass: Implementing EVA”, Harvard Business School Case No. 9-205-030

Here’s a good post on the downsides of using EBITDA as a measure of profitability:


Activity: Applying EVA

Finally, The Economist reports that at the start of 2023 the e-commerce firm Shopify deleted 12,000 recurring meetings from their employees shared calendars, and asked managers to think seriously about whether they should be reinstated. The results:

“The company reports a rise in productivity as a result of the cull.”

Learning Objectives: Opportunity cost reasoning, basic principles of negotiation.

Focus on diversity: The Hamilton Real Estate case is used as the first session on the Harvard MBA course on negotiation. It was written by Deepak Malhotra who has a recent book called ‘Negotiating the Impossible‘. You can follow him on Twitter @Prof_Malhotra.